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A Call for Action 

THE PEPPER COMMISSION 

U.S. Bipartisan Commission 
on Comprehensive Health Care 


Supplement to the Final Report 
September 1990 









D<jW 

H 




A Call for Action 


THE PEPPER COMMISSION 

U.S. Bipartisan Commission 
on Comprehensive Health Care 


Supplement to the Final Report 
September 1990 


S. Prt. 101-115 

Printed for the use of the Pepper Commission 


U.S GOVERNMENT PRINTING OFFICE 
28-861 WASHINGTON : 1990 


For sale by the Superintendent of Documents, U.S. Government Printing Office 

Washington, D.C. 20402 













THE PEPPER COMMISSION 


U.S. Bipartisan Commission on Comprehensive Health Care 


SENATOR JOHN D. ROCKEFELLER IV, West Virginia, Chairman 
House of Representatives Senate 


WO 

2 


FORTNEY PETE STARK, California, Vice Chairman 

BILL GRADISON, Ohio, Vice Chairman 

MARY ROSE OAKAR, Ohio 

LOUIS STOKES, Ohio 

THOMAS TAUKE, Iowa 

HENRY WAXMAN, California 


MAX BAUCUS, Montana, Vice Chairman 
DAVE DURENBERGER, Minnesota, Vice Chairman 
JOHN HEINZ, Pennsylvania 
EDWARD M. KENNEDY, Massachusetts 
DAVID PRYOR, Arkansas 


Presidential Appointees 


JAMES BALOG 
JOHN COGAN 
JAMES DAVIS, M.D. 


Staff Members 


Judith Feder, Staff Director 
Edward F. Howard, General Counsel 


Steven C. Edelstein 
Tiffany Ericksen 
Robert B. Friedland 
Janis E. Guerney 
Monica E. McFadden 
Philip Shandler 


Robyn I. Stone 
Dessa Vrtikapa 
Judith G. Waxman 
S. Mitchell Weitzman 
Joy Johnson Wilson 



TABLE OF CONTENTS 


Page 

HEALTH CARE 

West Germany’s Health-Care and Health-Insurance System: Combining Universal Access With Cost 

Control—Uwe E. Reinhardt, Ph.D. 3 

Europe’s Decentralized and Semi-Private Health Insurance—William A. Glaser. 19 

Controlling Health Care Costs—Mark Merlis. 27 

Medical Malpractice—Paul Weiler and Troyen A. Brennan. 43 

Design of Health Plan Benefits for the Nonelderly—Janet Lundy. 57 

Preventive Health Services—Melvina Ford and Mark Merlis. 67 

Health Benefits for Treatment Services for Substance Abuse and Mental Illness—Edward Klebe. 79 

Quality Assurance: A Comprehensive, National Strategy for Health Care Is Needed—General 

Accounting Office. 93 

Primary Care Service Delivery Programs—A Critical Element to Ensuring Access to Care—Bonnie 

Lefkowitz and Judy Rodgers. 105 

Limiting Favored Tax Treatment for Employee Health Insurance—Marilyn Moon, Ph.D. 121 

Fewer Resources, Greater Burdens: Medical Care Coverage for Low-Income Elderly People—Diane 

Rowland, Sc.D. 125 

LONG-TERM CARE 

Case Management in Long-Term Care—Office of Technology Assessment. 149 

Role of Federal and State Governments and Voluntary Organizations in Assuring Quality of Care 

in Selected Long-Term Care Services—Carol O’Shaughnessy and Richard Price. 161 

Due Process: Review and Appeal Procedures in Long-Term Care—Jane Handler Yurow. 173 

STAFF MEMORANDA AND BRIEFING PAPERS 

Canada’s Health Care System: Questions Americans Should Ask. 217 

Financing Long-Term Care in Canada. 219 

Comparing Health Care Financing Across Nations: A Summary. 221 

Comparing Financing and Delivery of Long-Term Care Across Nations: A Summary. 223 

Canadians’ Use of the American Health Care System. 225 

Comparison of Selected Comprehensive Health Plans. 227 

An Overview of Issues in Estimating the Market Potential for Private Long-Term Care Insurance.... 231 

Converting Life Insurance Benefits to Long-Term Care Benefits. 237 

Adding a Long-Term Care Option to Medicare. 239 


m 

























LIST OF TABLES 

Table Page 

HEALTH CARE 

West Germany’s Health-Care and Health-Insurance System: Combining Universal Access With Cost 
Control 

1 Alternative Mixes of Health-Insurance and Health-Care Delivery. 4 

2 Selected Demographic Data—United States and West Germany, 1985. 5 

3 Variance in the Payroll-Tax Rate Across West German Sickness Funds, 1988. 15 

Primary Care Service Delivery Programs—A Critical Element to Ensuring Access to Care 

1 How Increased Reimbursement Affects Capacity and Services in C/MHCs. 119 

Fewer Resources, Greater Burdens: Medical Care Coverage for Low-Income Elderly People 

1 Distribution of the Elderly Population by Poverty Level, 1988. 127 

2 Distribution of the Elderly Population by Income Level and Selected Characteristics, 1988. 128 

3 Characteristics of the Elderly Population by Income, 1988. 129 

4 Health Status, Medical Conditions and Other Related Problems of the Elderly Population, 

1984. 131 

5 Health Insurance Coverage of the Elderly Population, 1988. 131 

6 Health Insurance Coverage of the Elderly Population by Income, 1988. 132 

7 Medicaid Income Eligibility Limits for Elderly Individuals, 1989. 134 

8 Medicaid Income Eligibility Limits for Elderly Couples, 1989. 135 

9 Medicaid Resource Eligibility Limits for the Elderly Population, 1989. 136 

10 Use of Physician Services and Prescription Drugs by the Elderly Population by Insurance 

Coverage, 1987. 137 

11 Cost-Sharing Liabilities for Elderly Medicare Enrollees Resulting From the Use of Medicare 

Services, 1990. 139 

12 Out-of-Pocket Spending for Medical Care by the Elderly Population, 1989. 140 

13 The Impact of Medicaid on Out-of-Pocket Spending for Medical Care by Low-Income 

Elderly People, 1989. 142 

14 Shifts in Poverty Status Due to Medical Expenses. 142 

15 Number of New Eligibles Assisted by Proposal to Expand Medicaid Coverage of the Low- 

Income Elderly Population, 1990. 144 

16 Cost of Proposal to Expand Medicaid Coverage of the Low-Income Elderly Population, 

1990. 144 


IV 






















LIST OF FIGURES 

Figure p age 

HEALTH CARE 

West Germany’s Health-Care and Health-Insurance System: Combining Universal Access With Cost 
Control 

1 Direct Health-Care Expenditures, 1975-86. 5 

2 Sources and Uses of Direct Health Care Expenditures. 6 

3 The Structure of the West German Health Insurance System. 8 

4 Alternative Financial Arrangements Between Patients, Providers and Third-Party Payers. 12 

5 Average Premium in the Statutory Health Insurance System. 13 

Fewer Resources, Greater Burdens: Medical Care Coverage for Low-Income Elderly People 

1 Distribution of the Elderly Population by Poverty Level, 1988 . 127 

2 Percent of Elderly Who Are Poor or Near-Poor by Sex, Race, Age and Living Arrange¬ 

ment, 1988. 128 

3 Percent of Elderly People Reporting Fair or Poor Health by Income, 1984. 130 

4 Percent of Elderly Population With Selected Conditions, 1984. 130 

5 Health Insurance Coverage of Elderly People, 1988. 131 

6 Health Insurance Coverage of Elderly People by Income, 1988 . 132 

7 State Medicaid Eligibility Criteria for Elderly Individuals, 1989. 133 

8 Utilization of Physician Services by the Elderly Population by Insurance Coverage, 1987. 137 

9 Utilization of Prescription Drugs by the Elderly Population by Insurance Coverage, 1987. 138 

10 Hospitalization Rates for Selected Groups of Elderly People, 1984. 138 

11 Medicare Benefits and Cost-Sharing Liabilities for Hospital and Physician Services, 1990. 139 

12 Out-of-Pocket Expenses for Medical Care as a Percent of Per Capita Income, 1986. 140 

13 Components of Out-of-Pocket Spending for Medical Care, 1989. 140 

14 Percent of Elderly People With Out-of-Pocket Spending for Acute Care Exceeding 15 Per¬ 

cent of Income, 1986. 141 

15 Out-of-Pocket Spending as a Percent of Income for Low-Income Elderly People by Hospital 

Use and Insurance Coverage, 1986. 141 

16 The Impact of Medicaid on Out-of-Pocket Spending for Medical Care by Low-Income 

Elderly People, 1989. 142 

17 Poverty Among Elderly People Before and After Medical Expenses. 143 


v 












































































































Health Care 







WEST GERMANY’S HEALTH-CARE AND HEALTH- 
INSURANCE SYSTEM: COMBINING UNIVERSAL 
ACCESS WITH COST CONTROL 


Uwe E. Reinhardt, Ph.D.* * 


INTRODUCTION 

As the United States struggles with its twin prob¬ 
lems in health care—providing the nation’s low- 
income families with access to adequate health care, 
and controlling the cost of health care—it is natural 
to explore how other nations have tried to address 
these problems. 

The United States now spends slightly 11 percent 
of its GNP on health care. Most other industrialized 
nations spend only about 6 to 9 percent. Yet all of 
these nations have succeeded in extending compre¬ 
hensive health insurance coverage to all of their citi¬ 
zens, a goal that has so far eluded the United States 
for some 30 to 35 million Americans. 

These remarkable differences in spending and insur¬ 
ance coverage lead one to wonder (1) how other na¬ 
tions manage to enjoy universal insurance coverage 
and yet keep their outlays on health care so low, (2) 
precisely what additional benefits Americans actually 
receive for their much larger spending on health care 
and (3) what, if any, features of health systems abroad 
might be grafted upon the American health system. 

In searching for answers to these questions Ameri¬ 
cans have looked chiefly to their northern neighbor. 
Numerous articles and monographs have recently ap¬ 
peared on the strengths and shortcomings of Canada’s 
government-financed health system, and no American 
health-care conference has considered itself complete 
without at least one session on the Canadian system. 

The West German health system, however, may 
furnish an even more instructive data point from the 
American perspective. That system represents an at¬ 

• Report prepared for the U.S. Bipartisan Commission on Comprehensive 
Health Care by Uwe E. Reinhardt, Ph.D., James Madison Professor of Politi¬ 
cal Economy, Princeton University, August 30, 1989, Revised June 25, 1990. 


tempt to achieve horizontal equity in the distribution 
of health care and fairly good control over total 
health care expenditures without a complete takeover 
of the health-insurance system by the government. 
The chief policy instruments used to that end are (1) 
tight, statutory regulation of a network of self-govern¬ 
ing, self-financing sickness funds that observe sub¬ 
stantially identical methods and schedules for com¬ 
pensating the providers of health care, and (2) use of 
health-insurance premiums, rather than taxes and 
transfers, to redistribute income from relatively 
healthy or high-income groups to relatively sick or 
low-income groups. 

Table 1 illustrates the position of West Germany’s 
health system in the spectrum from purely govern¬ 
mental to purely private health care. That table makes 
a clear distinction between the production and the fi¬ 
nancing of health care, a distinction not usually made 
by observers who tends to lump together all foreign 
health-care systems under the derogatory label social¬ 
ized medicine. 

Strictly speaking, the term socialized medicine 
should be reserved for health systems in which the 
government operates the production of health care 
and provides its financing (i.e., systems in Cell A of 
the table). Great Britain and most of the Nordic coun¬ 
tries of Europe fit that label, as do the health systems 
operated by the U.S. Department of Veterans Affairs 
and by the Department of Defense. 1 

By contrast, one would not call Canada’s health 
system “socialized medicine” on that definition, be¬ 
cause Canada’s system combines socialized (govern¬ 
ment) financing of health care with a pluralistic, 

1 It is no small irony that President Eisenhower, a staunch opponent of so¬ 
cialized medicine, actually spent the bulk of his adult life in Box A of Table 

1, that is, relying on purely socialized medicine. Many American Congressmen 
and -women as well as Senators also rely on socialized medicine for their health 
care. 


3 




partly private and partly public delivery system that 
extends over all three rows in Table 1. Nor does the 
West German health system fit the label of socialized 
medicine. 


Table 1 Alternative Mixes of Health-Insurance 
and Health-Care Delivery 


Production and 
Delivery 

Collectivized (Socialized) Financing of Health 
Care 

Direct 

Financing 

Government 

Financed 

Insurance 

Private Health Insurance * 

Out of 
Pocket by 
Patients at 
Point of 
Service 

Within a 
statutory 
framework 

Within an 
unregulated 
market 

Purely 

Government 

Owned 

A 

D 

G 

J 

Private 

Not-for-Profit 

Entities 

B 

E 

H 

K 

Private 

For-Profit 

Entities 

C 

F 

1 

L 


The The West 
Canadian German 

Health Health 

System System 

* Note: Technically, whenever the receipt of health care is paid for by a third party 
rather than by the recipient at point of service, it is financed out of a collective pool 
and is thus "socialized” financing. In this sense, private health insurance is just as 
much "collectivist" or "socialized” as is government-provided health insurance. Both 
forms of financing destroy the normal working of a market, because both eliminate 
the individual benefit-cost calculus that is the sine-qua-non of a proper market. 

West Germany’s health system is concentrated in 
rows D, E and F of Table 1. It is even further re¬ 
moved from bona fide socialized medicine than is 
Canada’s health system, because both the production 
and the financing of health care in that country are 
pluralistic (although both facets are rather tightly 
constrained by Federal statutes). At this time, for 
example, only about 12 percent of total direct health¬ 
care expenditures in West Germany is paid for 
directly out of public budgets. The comparable Amer¬ 
ican number is 42 percent. 

It is probable that the American health system will 
eventually stumble toward an arrangement that will 
resemble West Germany’s in important respects, with 
a tightly regulated, private health-insurance industry 
taking the place of West Germany’s sickness funds. 
The scenario might be the following. Given the 
emerging pressures in the American economy, both 
the federal and the state and local governments are 
likely to continue in their attempts to procure health 
care for publicly insured patients at fees below the 
providers’ full cost, leaving private business—particu¬ 


larly small business firms with weak market power— 
to furnish proportionately more of the providers’ 
revenue. At the same time, the public sector is likely 
to shift financial responsibility for low-income, 
uninsured working Americans onto the shoulder of 
private business by mandating employer-paid health 
insurance. In return, the business sector—once again, 
particularly small business firms—can be counted on 
to ask for mandated open enrollment and community- 
rating, on the underwriting side of health insurance, 
and for common fee schedules applying to all payers, 
on the reimbursement side. That system would 
occupy cells D, E and F in Table 1. 

The remainder of this report provides a synposis of 
West Germany’s health system, with primary empha¬ 
sis on the insurance facet. The first section below is 
confined to the country’s health-care delivery system. 
The West German health-insurance system is de¬ 
scribed in the following section. The last section con¬ 
centrates on insights Americans might draw from the 
West German experience. 


THE WEST GERMAN HEALTH-CARE 
DELIVERY SYSTEM 

West Germany currently has a population of 61 
million. That population is, on average, much older 
than that of the United States. In 1985, for example, 
only 15 percent of West Germany’s population was 
younger than 15 years; the comparable American 
figure was 22 percent. On the other hand, close to 15 
percent of the West German population in that year 
was older than 65 years, compared with only 12 per¬ 
cent of the American population. Table 2 presents 
these and other demographic data. 

If the much older West German population were 
served by an American-style health-care financing and 
delivery system, the country obviously would have to 
spend much more on health care than does United 
States at this time, because the average per-capita 
health expenditures of older persons exceeds that of 
younger persons by a factor of 2 to 3. In fact, how¬ 
ever, West Germany somehow succeeds in spending 
considerably less on health care than does the United 
States, as is shown in Figure 1. Total direct spending 
on health services and supplies amounted to less than 
8 percent in West Germany during 1986, but to over 
10 percent in the United States. 2 


2 These numbers differ from the 11 percent or so that “national health ex¬ 
penditures” in the United States are said to be taking of “gross national prod¬ 
uct.” The category of “direct expenditures on health services and supplies” 
excludes certain public health activities of the government, medical research, 
and construction of medical facilities, all of which are included in the 


4 














Table 2 Selected Demographic Data—United 
States and West Germany, 1985 


Statistic 

United States 

West Germany 

Total Population. 

240 million 

61 million 

15% 

—percent under 15 years of 

22%. 

age. 



—percent over 65. 

12%. 

15% 

Life Expectancy: 


—male. 

71.1 years. 

71.2 years 
77.8 years 

9.6/1000 

—female. 

78.3 years.. 

Infant Mortality Rate *. 

10.6/1000. 


* Deaths of children one year or younger, per 1,000 live births; 1984. 


SOURCE: Schneider, Sommer and Keleci (1987), tables F.2.2.1 and F.8.2.1. 


Yet one does not often hear talk of rationing in 
West German health care—certainly not nearly as 
often as that issue is raised in the United States. West 
Germany has more physicians per capita than does 
the United States, and also more hospital beds. The 
country prides itself on its advanced, research-ori¬ 
ented pharmaceutical industry and on its reliance on 
high-tech medicine, which reaches into the practice of 
most private practitioners. There is some evidence 
that a variety of high-cost, high-tech medical technol¬ 
ogies are more abundantly available in the United 
States than they are in West Germany. But stories of 
“patient-dumping” or of poor patients who are denied 
access to available health care simply for want of abil¬ 
ity to pay—a regular feature now in America’s daily 
press—are completely unknown in West Germany. 
Such stories would horrify West Germans and un¬ 
doubtedly would bring swift remedial action by 
government. 

The West German health-care delivery system rep¬ 
resents a pluralistic mix of private medical practices 
and both private and publicly owned inpatient facili¬ 
ties among which patients typically may choose 
freely. 


tions of physicians and health-insurers, as will be de¬ 
scribed further on. 

Figure 1 Direct Health-Care Expenditures, 
1975-86 * 

UNITED STATES AND WEST GERMANY 


DRECT HEALTH-CARE EXPENDITURES PER CAPITA 

ADJUSTED FOR GE>€RAL-PRICE ILLATION 



DIRECT HEALTH-CARE EXPENDITURES, 1975-86 
AS A PERCENT OF GROSS DOMESTIC PRODUCT 



Of West Germany’s roughly 150,000 active physi¬ 
cians (about 245 physicians per 100,000 populations, 
compared with a comparable number of 220 in the 
United States), about 67,000 or 45 percent work in 
private, office-based ambulatory practice among 
whom patients have free choice. These physicians are 
compensated for their services on a fee-for-service 
basis, according to a predetermined and binding fee 
schedule that is negotiated between regional associa- 

broader definition of "national health expenditures.” The term “gross domes¬ 
tic product" refers to the total output produced within a nation’s boundaries, 
whether by nationals or foreigners residing within these boundaries. By con¬ 
trast, the term “gross national product” refers to the total output produced 
by a nation’s citizens, within the nation’s boundaries or abroad. In practice, 
the two national output measures do not differ substantially in magnitude. 


* Excludes Administrative Costs, Research and Construction. 

SOURCE: Schneider, Sommer and Kececi (1987). 

Under the strict, statutory dividing line between 
ambulatory and inpatient care imposed by German 
law, physicians in ambulatory practice do not follow 
their patients into the hospital after they have referred 
a patient there, as is the custom in the United States. 
Instead, all inpatient physician services are rendered 
by the 80,000 or so hospital-based physicians who are 
salaried employees of their hospital. Among these 
hospital-based physicians, only the chiefs have the 
privilege of seeing private patients on both an ambula¬ 
tory and an inpatient basis. 


5 





















West Germany has about 11 hospital beds per 1,000 
population, which is about twice the comparable 
American number. Close to half of all West German 
hospitals beds are in publicly owned facilities, mainly 
municipal hospitals. Another 35 percent of beds are in 
private, not-for-profit community hospitals, and 
close to 13 percent are in privately owned, for-profit 
facilities. 

As a rule, the capital budgets of West German hos¬ 
pitals—even of privately owned, for-profit hospitals— 
are furnished by the state governments, subject to a 
regional plan. The operating funds of hospitals, on the 
other hand, come from the nation’s health insurance 
system in the form of predetermined per diems that 
are negotiated by each hospital separately with re¬ 
gional associations of health insurers, under an all¬ 
payer-system. 

At this time, the average cost per inpatient day in 
West Germany is about DM 300 ($ 180), although 
there is some variation about this average, depending 
on the type and location of the hospital. About 15 
percent of the total per-diem cost represents the 
salary of hospital-based physicians. An inclusive per- 
diem cost of $ 180 or so may seem extremely low by 
American standards, but it is not strictly comparable 
to the American per diem cost, because the average 
length of stay in West German hospitals is over twice 
the American average. Part of that differential reflects 
the widespread use of West German hospital beds for 
long-term care. But average length of stay in West 
Germany is close to twice the American average even 
for well defined cases, such as a normal vaginal de¬ 
livery. The average patient-day in West German hos¬ 
pitals is thus not at all the same as is an American 
inpatient-day. Even so, it might be very interesting 
for Americans to study the West German hospital in¬ 
dustry more closely to ascertain whether significant 
cost differentials remain even after adjustment for 
case-mix and length of stay. 

Figure 2 presents compact data on the sources and 
uses of direct health-care expenditures in West Ger¬ 
many. The Statutory Health Insurance system ac¬ 
counts for about 70 percent of these outlays and 
private health insurance only about 7.4 percent. In 
contrast to the United States, where over 40 percent 
of direct health-care expenditures now flow through 
government budgets, only about 12 percent of West 
German health expenditures come directly from gov¬ 
ernment budgets. 

It will be noted that the West German hospital 
sector absorbs only about 36 percent of total direct 
health expenditures, and that figure includes the sala¬ 
ries of the country’s over 80,000 hospital-based physi¬ 


cians. By contrast, in 1987, hospitals absorbed about 
44 percent of total direct health-care spending in the 
United States, a figure that excludes the bulk of inpa¬ 
tient services rendered by physicians. The American 
statistic, however, does include the services of outpa¬ 
tient departments which are largely absent from the 
West German scene, because ambulatory care is by 
statute the domain of the country’s private medical 
practitioners. 

Figure 2 Sources and Uses of Direct Health 
Care Expenditures * 


WEST GERMANY. 1985 

SOURCES OF FUNDS 



USES OF FUNDS 



* Excludes Administrative Costs, Research and Construction. 

SOURCE: Schneider, Sommer and Kececi (1987), pp. 278-9. 

Finally, it will be noted in Figure 2 that private 
households in West Germany pay directly out of 
pocket for only about 7 percent of total direct health¬ 
care expenditures, mainly for over-the-counter drugs 
and appliances (for example eye glasses) of a higher 
quality than that fully covered by health insurance. In 
general, West Germans bear few if any out-of-pocket 


6 







expenses for health care at the time such care is re¬ 
ceived. By contrast, American households pay di¬ 
rectly out of pocket some 26 percent of total direct 
health expenditures, which is the highest degree of 
cost sharing by patients in the industrialized world. 
This circumstance may come as a surprise to those 
who view excessive health-insurance coverage as the 
main culprit behind America’s high health-care 
expenditures. 

A quite unique feature of the West German health 
system is the so-called “Concerted Action” 
(Konzertierte Aktion), an annual assembly of all of the 
stakeholders in the country’s health care system. This 
annual assembly was mandated by Federal law in 
1977. It includes representatives of the associations of 
all of the providers (including pharmacists), of the 
Statutory and private health insurance carriers, of the 
pharmaceutical industry, of the major unions and 
associations of employers, and representatives of the 
state and local governments. It is the task of this as¬ 
sembly to establish annually broad, national guidelines 
for the economic development of the health care 
system, among them the overall growth in expendi¬ 
tures relative to the expected growth of the Gross 
National Product (GNP). 

The assembly was intended by government to serve 
as a consensus-building device. It does not have gov¬ 
ernmental powers. For example, the guidelines it 
establishes are not legally binding upon any of the 
parties; they merely serve as benchmarks for negotia¬ 
tions over fees, prices and per diems of health services 
that take place annually at the state level between 
associations of insurers and of providers. The assem¬ 
bly has, so far, carried forward its work with varying 
success, but is generally credited with having had 
some constraining effect on negotiations at the lower 
level. Furthermore, its work is widely covered in the 
media. 


WEST GERMANY’S 
HEALTH INSURANCE SYSTEM 

Virtually the entire West German population has 
comprehensive health insurance coverage for a very 
broad range of benefits that includes ambulatory phy¬ 
sician care, all inpatient care, prescription drugs, 
dental care, medical supplies and appliances, and even 
recreational stays (the so-called Kuren) in health spas 
following major bouts of illness or merely a state of 
exhaustion. With minor exceptions, the covered serv¬ 
ices are made available to patients free of coinsurance 


and deductables at point of service. 3 Until the Health- 
Care Reform Act of 1988, the sickness funds even 
paid for taxis the elderly might take to see the doctor. 

As a general rule, all West Germans have free 
choice of doctor, hospital, pharmacist and other 
providers of health care. Closed-panel arrangements— 
such as the American Preferred Provider Organiza¬ 
tion (PPOs) of Health Maintenance Organization 
(HMOs) that lock patients into defmed subsets of pro¬ 
viders—are unknown in West Germany, although 
there had been unsuccessful attempts to introduce 
HMOs in West Germany prior to World War II. 

The comprehensive insurance coverage enjoyed by 
West Germans is provided by a highly structured and 
highly regulated insurance system that cannot be 
easily labelled as either private or public in the Amer¬ 
ican sense of those terms. About 90 percent of the 
population is covered by the so-called Statutory 
Health Insurance system (the Gesetzliche Kran- 
kenversicherurtg or GKV) that has, for over one hun¬ 
dred years, constituted the backbone of the country’s 
health-insurance system. Close to 9 percent of the 
population is covered by private, commercial insur¬ 
ance carriers. The remainder is covered by various 
governmental programs, notably those for the police 
and the military. The number of uninsured individuals 
at any point in time is below 0.3 percent. 

Figure 3 provides a road-map of this structured 
health-insurance system. The percentages shown in 
that display represent the fraction of the West 
German population belonging to each type of insur¬ 
ance carrier. 


The Statutory Health Insurance 
System (The GKV) 

The Statutory Health Insurance System (the 
Gesetzliche Krankenversicherung or GKV) is composed 
of some 1,200 fiscally independent, self-governing, 
not-for-profit sickness funds, each of which serves 
either a specific, typically small geographic area (the 
Local Sickness Funds or Allgemeine Orts- 
krankenkassen ), or the workers of a particular firm 
(the Betriebskrankenkassen ), or members of a particu¬ 
lar trade or craft (the Innungskrankenkassen). To¬ 
gether, these funds are commonly referred to as the 
“RVO” funds. They have been the corner stone of 
the country’s social security system, which dates its 


3 There are some co-payments for certain dental procedures and for some 
higher-priced brand-name drugs for which lower-priced substitutes 
are available. 


7 



origin to the late 1800s, and were originally intended blue- and white-collar workers will disappear alto- 
to cover only blue-collar workers. gether from the Statutory system. 


Figure 3 The Structure of the West German 
Health Insurance System 


(THE NUMBER ARE PERCENTAGES OF THE POPULATION IN EACH TYPE OF FUND. 1986) 


PRIVATE 

CARRIERS 

8.7% 


THE STATUTORY SICKNESS FUNDS 
90.9% 


THE RVO FUNDS 
61.5% 


SUBSTITUTE 

1 

1 

1 

LOCAL 


COMPANY- 


CRAFT AND 

FUNDS 

1 

SICKNESS 


BASED 


OTHER 


1 

1 

FUNDS 


FUNDS 


FUNDS 

27.3% 

1 

1 

1 

1 

40.2% 


11.8% 


1 1.6% 


SOURCE: Verband der Privaten Krankenversicherungen e.V. Die Private 
Krankenversicherung, Zahlenbericht 1987/88, p. 13. 


The operation of the RVO Funds (including benefit 
package as well as underwriting and reimbursement 
practices) have been tightly regulated by a federal in¬ 
surance statute (the Reichsversicherungsordnung or 
RVO), which has been amended repeatedly to adapt 
the Statute to changing demographic and economic 
conditions. 4 


Every West German is entitled to join the Statu¬ 
tory Health Insurance system. An individual’s “mem¬ 
bership” in a Statutory sickness fund automatically 
covers all of the member’s dependent family members. 
Membership in the Statutory system compulsory for 
employees with a specified income limit (currently 
about DM 55,000 ($30,000) per year) and for retired 
persons who had belonged to the system during their 
work life. At this time, roughly three quarters of the 
90 percent of the population insured under the Statu¬ 
tory system are compulsory members. The remainder 
have joined the system voluntarily. 

Once a West German joins a particular sickness 
fund within the Statutory system, he or she typically 
remains with that fund for life, unless his or her 
income rises above the threshold below which Statu¬ 
tory insurance is compulsory and the individual exer¬ 
cises the option either to join a Substitute Fund or to 
choose private health insurance. 

Employed sickness-fund members pay for their own 
and their families’ insurance coverage with a contribu¬ 
tion that is strictly a percentage of their total compen¬ 
sation (roughly, salary and fringe benefits before 
taxes) 5 and not at all related to either the size of the 
family or its health status. The premiums of retired 
persons are paid by the retirees’ pension funds in the 
form of a flat percentage of the retiree’s pension (now 
a national average of 12.9%). That percentage is equal 
to the average payroll contribution rate (the 
Beitragssatz ) working members make to the fund. 


Subsequently, there were added to the RVO Funds 
the Substitute Funds (Ersatzkassen) for white-collar 
workers. There are now 15 such funds, each of them 
operating nationwide. The Substitute Funds, too, are 
subject to the federal insurance statute and form an 
integral part of the Statutory Health Insurance system 
(the GKV). Until very recently, blue-collar workers 
in the Statutory system did not have access to the 
Substitute Funds, which were reserved strictly for 
white-collar ^workers. The latter, on the other hand, 
could elect membership in either a Substitute Fund or 
the RVO fund relevant to their locality or company. 
Since the Health Reform Act ( Gesundheitsreformgesetz 
or GRG) of 1989, however, blue-collar workers ex¬ 
ceeding a certain income limit may elect membership 
in either their appropriate RVO Fund or a Substitute 
Fund or private health insurance. It can be expected 
that, before long, the archaic distinction between 


4 Incidentally, the RVO Statute has served as a model also for the Dutch 
and Belgium health insurance systems. 


Obviously, the premiums paid by the elderly are 
much below the true actuarial cost of caring for the 
elderly. In 1989, for example, the premiums paid by 
the elderly covered only about 40 percent of the sick¬ 
ness funds’ outlays on the elderly (in 1977 that per¬ 
centage had still been as high as 65 percent). The 
difference is made up by cross-subsidies paid by work¬ 
ing members of the funds, a transfer that is becoming 
a source of contention among the generations. Funds 
with a particularly heavy load of retired members re¬ 
ceive compensating contributions from a national re¬ 
serve fund (the Krankenversicherung der Rentner). The 
objective of that system is to equalize across the vari¬ 
ous sickness funds the financial burden imposed by 
the aged on working members. 

Because premiums in the Statutory system are 
based on ability to pay and cover also the insured 


5 The system maintains the fiction that half of this contribution is paid by 
the employer and half by the employee. In fact, of course, the total contribu¬ 
tion can be thought of as being paid out of the worker’s gross wages. 


8 




























member’s dependent family members, while commer¬ 
cial carriers charge premiums based on actuarial cost, 
most individuals who do have the option to seek pri¬ 
vate coverage nevertheless prefer coverage under the 
Statutory system as well (although there has been 
somewhat more rapid migration to the private system 
in recent years). Furthermore, under the recently 
passed Health Insurance Reform Act of 1989 (the 
Gesundheitsreformgesetz or GRG), persons who have 
opted out of the Statutory system in favor of private 
health insurance lose the right ever to return to the 
Statutory system (as they hitherto could). Younger, 
single persons who may now find it financially advan¬ 
tageous to exit the Statutory system may later come 
to regret that step when they found families. They 
will therefore think twice before opting out of the 
system. 

Administration of the Statutory System—The Statu¬ 
tory sickness funds are managed within the private 
sector, under the stewardship of boards of trustees, 
half of whose seats are filled from the ranks of unions 
and half from the ranks of employers, with the chair¬ 
manship rotating between these two groups. 

In principle, each of these funds is to be fully fi¬ 
nanced by its members, who are either workers or re¬ 
tired persons. Since passage of the Health-Care 
Reform Act in 1988, however, sickness funds in par¬ 
ticular fiscal distress do in some states receive cross¬ 
subsidies from financially better of funds. 

Although the Statutory sickness funds tend to con¬ 
sider themselves part of West Germany’s private 
sector, they are at best a distant cousin of what Amer¬ 
icans would consider the “private sector.” The Statu¬ 
tory funds operate within very tight Federal statutes 
that, as noted, dictate not only the catalogue of bene¬ 
fits these funds must offer their members, but also 
their governance, as well as their fiscal and regulatory 
relationships with the providers of health care. One 
may therefore think of the Statutory system also as a 
private-sector extension of the government’s will. 
They are private, self-financing and self-governing en¬ 
tities charged with certain governmental duties and, 
therefore, endowed with certain governmental 
powers, among them the power to levy payroll taxes 
on employed persons and their employers and to re¬ 
distribute economic privilege among its members. 

Compensation of Providers Under the Statutory 
System—Within a region (usually a state or a sub-state 
region), the Statutory sickness funds join together in 
associations to negotiate with counter-part associa¬ 
tions of physicians schedules of fees that must be 
accepted by the individual physician as payment 
in full. The regional negotiations are based on a 


national relative-value scale (the Einheitlicher 
Bewertungsmassstab or EBM) that is negotiated for the 
entire Statutory Health-Insurance System between na¬ 
tional associations of all sickness funds and the cor¬ 
responding national associations of sickness-fund 
physicians. 

Although, as members of the Statutory Health In¬ 
surance system, the Substitute Funds (Ersatzkassen) 
share with the RVO Funds the common, national rel¬ 
ative-value scale for physician services, they negotiate 
the monetary value per relative-value point separately 
with the corresponding regional physician associations 
and have traditionally paid slightly more than the 
RVO Funds. In 1988, for example, they paid physi¬ 
cians Deutsche Mark (DM) 0.0935 per point, versus 
an average of about DM 0.0915 per point paid by the 
RVO Funds. The RVO Funds in a region all pay the 
same fees to physicians. Americans would describe 
such an arrangement as an all-payer system. 

In 1985, the sickness-fund physician associations 
agreed to accept an overall expenditure cap for their 
services. Although it had been hoped by the associa¬ 
tions that this cap would eventually be lifted, the cap 
is still in place and is apt to remain so for the foresee¬ 
able future. Because all Statutory sickness funds work 
with the same relative value scale, it is easy to imple¬ 
ment the cap under that system: if the utilization of 
services threatens to put total expenditures over the 
cap, the monetary value per relative-value point is 
automatically reduced. 

The expenditure cap is negotiated annually as so 
many Deutsche Marks (DM) per insured, after adjust¬ 
ments for age and sex. Once that amount has been set, 
the total budget is turned over by the sickness funds 
to their counter-part physician associations who then 
disburse the fund to their members on a fee-for-serv- 
ice basis. In a nutshell, then, the system subjects all 
physicians to a zero-sum-game jealously watched by 
the physician associations themselves. It is they who 
police their own members. 

The introduction of the expenditure cap for physi¬ 
cians has not led to the rationing of health care, a 
consequence widely predicted by the American Medi¬ 
cal Association for the expenditure targets proposed 
for the United States. On the contrary, the steady de¬ 
cline of the monetary value per relative-value point in 
West Germany suggests that the number of services 
delivered to patients has increased substantially as a 
result of the cap. 

The Statutory sickness funds negotiate jointly with 
each hospital a predetermined, binding per diem based 
on approved, projected line-item operating budgets. 


9 



As already noted, these per diems now average about 
$ 180. There has been some experimentation with re¬ 
imbursement by DRG on the American model, or 
with a system that combines a basic per diem with a 
fee-for-service catalogue for ancillary services. 

Unlike the typical American health insurance 
policy, West German insurance policies typically pro¬ 
vide fairly complete coverage also for dental care (in¬ 
cluding dentures) and for all prescription drugs. 

Dentists are paid negotiated, predetermined fees for 
their services. These fees have been so high in recent 
years that West German dentists enjoy a higher 
income than do West German physicians in private, 
ambulatory practice (who earn a pre-tax net practice 
income of about $ 90,000). In order to curb the dis¬ 
proportionate growth in their outlays for dental care, 
which appears to be driven by outlays for dentures, 
recent legislation has mandated substantial cost shar¬ 
ing by patients for dentures. 

Until January of 1989, both the private insurance 
carriers and the Statutory sickness funds paid pharma¬ 
cies the full retail price of whatever medications phy¬ 
sician had prescribed. Patients did not share in the 
cost of prescriptions drugs, but merely paid a modest 
fee (DM 3) per prescription. The price the insurance 
carrier was forced to pay the pharmacist was the sum 
of (a) the manufacturer’s price, which the manufacturer 
was free to set plus (b) a regulated, fixed wholesale 
mark-up plus (c) a regulated, fixed retail mark-up. 
The private carriers and the sickness funds all pay the 
same retail price. 

This open-ended pricing policy left the demand-side 
of the market effectively without countervailing 
power. Combined with the effect of full-insurance 
coverage, it led to a relatively large allocation of 
West German health-care expenditures on prescrip¬ 
tion drugs. As is shown in Figure 2, close to 17 per¬ 
cent of total direct health-care expenditures in West 
Germany go for the payment of pharmaceuticals. In 
the United States, where over 75 percent of all drugs 
and sundries are still paid for directly by patients at 
point of receipt, only about 7 percent of total direct 
health-care expenditures goes for that item. 

To control the large outlays for prescription drugs 
in the West German health system, the conservative 
Kohl government drastically altered the payment for 
insured prescription drugs as part of its so-called 
Health-Care Reform Act passed in November of 
1988. For West Germany’s pharmaceutical industry, 
this Act has been nothing short of revolutionary. It is 
bound to shrink the size of that industry in the years 
ahead. 


Henceforth, prescription drugs are to be assembled 
into groups of “equivalent” drugs, where the defini¬ 
tion of “equivalency” is to be broadened gradually 
over time eventually to include groupings of totally 
different chemical substances deemed to be “therapeu¬ 
tically equivalent” (Phase III in the evolving defini¬ 
tion of “equivalency”). Under the new pricing policy 
established by the Act, the insurance carrier covers 
fully only the price of a selected low-cost drug in the 
equivalence group—typically a generic. If patients or 
their physicians insist on a higher-priced brand-name 
drug, the patient must pay the price differential out of 
pocket. 

So far, the publication of the first equivalence 
groupings and the least-cost for each has completely 
shocked the pharmaceutical manufacturers and has 
led brand-name producers to slash their prices by up 
to 40-50 percent for competing drugs within the an¬ 
nounced groupings. They have done so, because they 
fear that West Germany’s spoiled patients will never 
consent to paying sizeable sums out of pocket for 
brand-name drugs in the equivalence groups. 


The Commercial Insurance Carriers 

The roughly 5.5 million West Germans (close to 9 
percent of the population) covered by the 42 private, 
commercial (for-profit) insurance carriers in 1986 in¬ 
clude civil servants, self-employed individuals, retirees 
who were covered by private insurance during their 
work years and white collar workers with an income 
above about DM 55,000 or $ 30,000 per year (in 
1989/90) who have chosen to opt out of the Statutory 
system. 

As already noted, the premiums charged by the pri¬ 
vate carriers reflect the actuarial risk of five-year co¬ 
horts. Unlike the Statutory system, which employs 
coinsurance only sparingly, privately insured patients 
may choose among alternative plans, with varying de¬ 
grees of cost-sharing and commensurately varying 
premiums. 

An insured who enters an insurance contract with a 
private carrier pays the premium appropriate for his 
or her five-year cohort at that time. Thereafter, the 
premium is not raised further as a function of the 
insured’s age. It can be increased only to reflect gen¬ 
eral increases in health-care costs that affect all age 
groups. In effect, then, this premium structure resem¬ 
bles the level-premiums American life-insurance com¬ 
panies levy for their whole-life life-insurance policies. 
And like these policies, a private West German 
health-insurance policy overcharges young people rel- 


10 


ative to their own actuarial, short-term risk and forces 
them to build up an old-age health-insurance reserve, 
the so-called Altersruecklage. 

By law, West Germans who decide to leave their 
private insurance carrier for another private carrier 
forfeit their accumulated old-age health-insurance re¬ 
serve. Furthermore, upon joining the other carrier, 
such persons must then pay the premiums appropriate 
for their age-cohort at the time of the switch. This 
policy is intended to force privately-insured persons 
into life-cycle planning as well, for it contains the 
powerful financial inducement to stay with one car¬ 
rier for life. 

About 4.6 million West Germans covered by the 
Statutory system purchase supplementary insurance 
coverage from the private carriers. These supplemen¬ 
tary policies typically cover semi-private accommoda¬ 
tions in hospitals and cash allowance per hospital day 
or day of illness. 

The private insurance carriers compensate physi¬ 
cians on the basis of a statutory fee schedule (the so- 
called Gebuehrenordnung fuer Aerzte or GOA) set by 
the Federal government (after consultation with ex¬ 
perts and the medical profession) and applicable only 
to the private-insurance sector. Although, in principle, 
the relative value scale underlying this fees schedule 
is not the same as that underlying the fee schedule 
used by the Statutory Health Insurance system (the 
so-called EBM schedule described earlier), the two 
relative value scales have come ever closer together 
over time, as the government leaned on the Statutory 
RVS in establishing the RVS for the private health- 
insurance system. 

As a rule, physicians treating privately-insured pa¬ 
tients may bill the insurer up to 2.3 times the official 
fee schedule, as most of them now do. Physicians may 
exceed even this maximum multiple, but only after 
justifying such extra billing in advance and in writing. 
Some physicians do so—notably the chiefs of staff in 
hospitals who, as a rule, may treat patients on a pri¬ 
vate basis very much like their American colleagues 
who have hospital privileges. 

For hospital care, the private insurance car¬ 
riers pay predetermined per-diems. These lie some¬ 
what below the per-diems paid by the Statutory 
system, because hospital-based physicians who treat 
private patients in the hospital (typically only the 
chiefs of services) bill their patients directly for in¬ 
patient physician services, while the per diems paid 
hospitals by the Statutory sickness funds cover all in¬ 
patient physician services rendered by the hospital’s 
staff of employed physicians. 


In addition to this (somewhat lower) basic per 
diem, however, the private carrier must pay sizeable 
surcharges for the semi-private rooms (typically 
double-occupancy rooms) occupied by their insured. 
In 1988, for example, the average basic per diem rate 
for private insurers was DM 251 ($ 128) and the sur¬ 
charge for a private room was DM 116 ($ 60). 

The private carriers and the Statutory sickness 
funds pay the same prices for prescription drugs. 

Administrative Cost of 
West German Insurance 

The administrative cost of West German health-in¬ 
surance is relatively low. 

For the Statutory sickness funds, these costs 
amount to about 4 to 5 percent of total premium 
income. Although the sickness-fund physician associa¬ 
tions who actually pay the individual physician have 
additional administrative cost, the overall administra¬ 
tive cost of the system, including the billing costs 
borne by individual physicians and hospitals, probably 
lies substantially below the average such leakage reg¬ 
istered by the complex American system. 

The private insurance carriers distinguish between 
purely administrative costs—about 4.4 percent of pre¬ 
mium income in 1987 and probably comparable to the 
number reported by the Statutory sickness funds—and 
the so-called “closing costs” (Abschlusskosten), which 
represents the marketing and administrative costs of 
establishing new insurance policies. In 1987, these 
closing costs amounted to about 11.6 percent of total 
premium income. 6 It appears, then, that the total loss 
ratio (payments to providers/premium income) in pri¬ 
vate health insurance exceeds that under the Statutory 
system by a considerable margin. 


LESSONS FROM THE 
WEST GERMAN EXPERIENCE 

The American health-care system, which relies on a 
great number of independent third-party payers for its 
financing, faces problems not encountered by systems, 
such as Canada’s, in which the flow of funds to pro- 


6 See Verband der Privaten Krankenversicherungen e.V., Die Private 
Krankenversicherung: Zahlenbericht 1987/1988, September 1988, p.54. Ac¬ 
cording to that annual report, the pure administrative costs in 1987 were DM 
602 million, said to be 4.33 percent of total premium income. The total clos¬ 
ing costs for that year were reported as DM 1.6 billion, which must therefore 
have represented 11.6 percent of total premium income. 


11 



viders is concentrated in the hands of one single third 
party, usually the government. 

First, in a multi-carrier system the providers may 
find it easy to divide payers and thus rule them. 
Second, if consumers are given free choice among 
competing insurance carriers, a multi-carrier system 
can be plagued by judicious, adverse-risk selection, 
and the exclusion of high-risk, low-income families 
from insurance coverage altogether. The American 
health system furnishes a prime example of all of 
these tendencies. 

Both sets of problems have been addressed through 
statutory constraints in the West German health 
system, although not with complete success. Indeed, 
there are now sufficient stresses in the system to have 
triggered widespread calls for a fundamental reform 
of West Germany’s health-insurance system. 


Amassing Market Power on the 
Demand Side 

The diagrams in Figure 4 overleaf depict two dis¬ 
tinct set of relationships among the three major actors 
in health care: patients, providers and third-party 
payers. 

The top figure illustrates the manner in which 
money flows from society to the providers of health 
care. That flow now goes through a myriad of inde¬ 
pendent and uncoordinated pipes of varying size. 
Most of these pipes are so small, relative to the over¬ 
all money flow, that persons controlling their valves 
cannot exert much influence over the market for 
health care. Should they seek to constrain prices, they 
can easily be threatened by providers with loss of 
access to health for the insured covered by that 
money pipe. It is a system designed to maximize the 
transfer of Gross National product from the rest of 
society to the providers of care. 

Indeed, it is a system so constructed that it effec¬ 
tively shields most Americans from knowing, at any 
time of the year, precisely how much their families 
spend on health care. The money flow from house¬ 
holds to pay for uninsured services, coinsurance for 
partially covered services, contributions to insurance 
coverage, and so on is so complex that it takes a spe¬ 
cial effort to tabulate it all for one year. 

It can be argued that this is precisely as it should 
be, that most other markets in the economy also are 
characterized by a myriad of money pipes to the sup¬ 
pliers. The counter-argument that has prevailed in 


most modern societies—certainly in West Germany— 
is that the ethical dimensions of health care, and the 
fact that the bulk of health expenditures are ac¬ 
counted for by very sick, aching and frightened indi¬ 
viduals makes analogies with regular markets moot 
for health care. 


Figure 4 Alternative Financial Arrangements 
Between Patients, Providers and Third-Party 
Payers 



Monopsonistic Financing 




~ _ 


Most other countries have therefore all but relieved 
the individual patients from the role of a cost-control¬ 
ling consumer. Instead of conceiving of the health¬ 
care market as a set of economic transactions between 
individual patients and providers, they have trans¬ 
ferred the economic facet of these transactions to a 
middle plane where prices are negotiated between 
associations of third-party payers and association of 
physicians. In other words, they have concentrated 
the money flow to providers into one (or at most a 
few) large pipes whose valves are operated through 
negotiation, as is illustrated in the bottom panel of 
Figure 4. 


12 













































In the Canadian health system, for example, there 
really is but one money pipe to providers per prov¬ 
ince. That pipe originates in the provincial govern¬ 
ment, which administers health insurance in that 
country. In West Germany, on the other hand, there 
are over a thousand pipes going from the sickness 
funds or private insurance carriers to the providers. 
The money flow through these pipes, however, is co¬ 
ordinated at the level of the state (Land) into all¬ 
payer systems which offers the payer a degree of 
market power similar to that enjoyed by truly single¬ 
source payers. For that reason, it is not inappropriate 
to think of West Germany’s health system as effec¬ 
tively a single-pipe system as well. 

Every German household knows what it spends per 
year for comprehensive health service, for that spend¬ 
ing can be read off a simple barometer: the percent¬ 
age of gross-compensation paid to the sickness fund, 
or the insurance premium paid to a private carrier. 
This simple index is very carefully read by the citi¬ 
zenry, by employers and by the government. Figure 
5, taken directly from the trade journal of the Local 
Sickness Funds, illustrates this barometer graphically. 
The previously cited Health-Care Reform Act of 1988 
was the government’s reaction to the sharp increase in 
the contribution rate after 1984. The chief objective 
of that Act has been to stabilize that contribution rate. 

Figure 5 Average Premium in the Statutory 
Health Insurance System 

(PREKVM AS PERCENT OF GROSS COMPENSATION) 


* H 



SOURCE: AOK Bundesvertoartd, "AOK Bllanz '88: GRG verstaertte den 
Ausgabenzuwachs," DOK Polrtik, Praxis, Recht, vo). 12, June 15, 1989, p. 367. 

The single-pipe or quasi-single-pipe health-insurance 
systems prevalent throughout Europe and in Canada 
have certain advantages and drawbacks that deserve 
further comment. 


First, the systems enable those who directly and ul¬ 
timately pay for health care to procure health services 
at lower monetary transfers to provider per unit of 
real health service than is paid under the looser 
American system. Second, these systems enable those 
who control the valve of the single pipe literally to 
determine that physical capacity of the health system. 
They can make favorable turns of the valve contin¬ 
gent upon regional health planning, as is the case in 
all of these nations. 

In short, then, the single-pipe approach probably 
more so than any other factor enables these countries 
to allocate to health care a much smaller slice of the 
Gross National Product than is being allocated in the 
United States. If Americans are unwilling to counte¬ 
nance that approach and prefer to continue with their 
myriad-pipe system, they are likely always to pay more 
for health care, per unit of service and overall, than 
they otherwise would. 

But these single-pipe systems also have drawbacks 
that should be acknowledged. 

Clearly, a single-pipe system is vulnerable to possi¬ 
ble mistakes made by the few who wrangle at the 
single valve. Such a system may allocate less to health 
care than the citizenry actually would like to see allo¬ 
cated, if it had its choice, and it may also provide less 
variety in health care than the citizenry might want. 

Furthermore, such a system makes it far more risky 
for entrepreneurs to venture their funds in search of 
new medical technology, because those at the valve 
may capriciously refuse to pay for that technology. 

Finally, from the viewpoint of providers single-pipe 
systems are clearly undesirable. They manifestly tend 
to reduce the providers’ income. There is no reason 
why normal, income-seeking providers of health care 
should favor a system that serves to shrink their 
income. 


Avoiding Adverse-Risk Selection 

The term “adverse-risk selection” has varied mean¬ 
ings in discussions on health policy, and it is often 
misused. For purposes of this discussion, adverse-risk 
selection refers to situations in which the distribution 
of actuarial risks among different insurance pools is 
not perfectly matched by the distribution of premium 
income needed to cover those risks. 

Suppose, for example, that the likelihood of particu¬ 
lar levels of health expenditures for an individual 


13 







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non-transferable old-age reserve that effectively locks 
an insured into a particular private carrier for life. 


Threats to the Principle of Solidarity 

Not surprisingly, this approach to eliminate ad¬ 
verse-risk selection and, at the same time, to effect a 
redistribution of income through the Statutory sys¬ 
tem’s premium structure has led to considerable strain 
within the system. Because the individual sickness 
fund is empowered to levy whatever payroll-tax is 
necessary to cover the risk-mix of its own members, 
these taxes vary widely among the funds. Table 3 il¬ 
lustrates this phenomenon with the most recent data. 
It is impossible to defend these highly different pay- 
roll-tax rates with any appeal to social equity, and one 
must wonder why these differentials have not led to a 
more open revolt among the insured and their em¬ 
ployers alike. But that revolt is starting. 


Table 3 Variance in the Payroll-Tax Rate Across 
West German Sickness Funds, 1988 


Type of Fund 

Payroll-Tax Rates * 

Range 

Average 

Local Sickness Funds. 

10.8-16.0% 

13.5% 

Company-based Funds. 

7.5-15.0% 

11.5% 

Craft-based Funds. 

9.8-15.6% 

12.8% 

Substitute Funds: 

—blue collar. 

10.2-14.6% 

11.9% 

—white collar. 

18.8-12.9% 

12.7% 

All Statutory Funds. 

7.5-16.0% 

12.9% 


* Employer’s and employees’s contribution to sickness fund, as a percentage of 
gross compensation (including fringes). 


SOURCE: Guntram Bauer and Franz Schoenhofen, “Risikostrukturen und Beitrags- 
satunterschiede in der GKV,” DieOrtskrankenskasse, vol. 22, November 15, 1988, 
Table 1, p. 650. 

Round One in that revolt is the increasing tendency 
among large business firms to take their employees 
out of high-premium sickness funds and to fold them 
instead into newly established company-based sickness 
funds (Betriebskrankenkassen) whose actuarial health¬ 
care costs may be lower. As Table 3 shows, such a 
switch might yield these companies substantial sav¬ 
ings, at least in the short run, while their fund 
members are still young. Naturally, this move is vig¬ 
orously opposed by the other funds in the system, 
particularly by the Local Sickness Funds that cover a 
demonstrably higher average morbidity. 

The Local Sickness Funds have entered the fray 
from another comer. They would like to see legisla¬ 
tion mandating inter-fund financial transfers to com¬ 
pensate for differences in the risk borne by individual 


funds. Such transfers are already being made in some 
states within particular types of sickness funds (for ex¬ 
ample, within the company-based funds), but not yet 
across types of funds. 

Although the Local Sickness Funds do have a le¬ 
gitimate point, their plea is opposed by other funds in 
the system on the ground that, pushed to its logical 
conclusion, the policy would convert the Statutory 
Health Insurance system into one single, national 
fund, a Universalkasse with one level of payroll tax 
and one benefit package for all members. Such a 
result, although perfectly equitable on its face, would 
make the Statutory system resemble more and more a 
fully government-financed system, such as Canada’s. 

Yet another attack on the present system comes 
from West Germany’s neoclassical economists who, 
like their colleagues on this side of the Atlantic, 
regard as the only fair and efficient health-insurance 
system one priced strictly on actuarial principles and 
one offering every citizen the widest conceivable 
choice among competing funds. Neoclassical econo¬ 
mists believe that governmental paternalism should 
not override individual myopia and that the indi¬ 
vidual should be made to suffer the consequences of 
his or her myopia. Neoclassical economists also be¬ 
lieve that health insurance premiums are not a proper 
vehicle for the redistribution of income—that if soci¬ 
ety wishes to assist poor and sickly citizens, it should 
do so with taxes and cash transfers (or, at most, 
vouchers). 

The West German government plans to arbitrate 
the emerging fight over West Germany’s health insur¬ 
ance system with legislation scheduled for 1992. Con¬ 
siderable public debate will precede that legislation. If 
the philosophy of the Local Sickness Funds were to 
prevail, the West German health-insurance system 
would move substantially toward a government-fi¬ 
nanced system on the Canadian model. On the other 
hand, if the neoclassical school of thought were to 
prevail, the system would abandon the Principle of 
Solidarity altogether and become more like the Ameri¬ 
can health system. The status quo is unlikely to be 
tenable over the long run. 

West Germans, however, would be unlikely to 
move toward the American health-insurance model 
which is decried, throughout Europe, as not only 
wasteful, but also grossly inequitable. A move to¬ 
wards the Canadian model probably would be more 
palatable to West Germans unless, as seems more 
likely, the system can evolve towards a more work¬ 
able middle ground. One such compromise might be a 


15 














model akin to the highly regulated pluralism advo¬ 
cated by Enthoven and Kronick. 10 

An alternative compromise might be to mandate 
upon the system more extensive inter-fund redistribu¬ 
tions of premium income and to encourage more ex¬ 
tensive emigration from the Statutory system towards 
the private-health insurance sector. That approach 
would preserve the structured health-insurance system 
(die gegliederte Kran/cenversicherung) that, according to 
most West Germans, has served the country well for 
over a century. 

A basic lesson Americans can draw from the West 
German health experience is that it is possible to pro¬ 
vide universal access to health insurance—and to 
needed health care—without having the financing for 
such a system flow through the public budget. 


DIRECT HEALTH-CARE EXPENDITURES PER CAPITA 

ADJUSTED FOR GENERAL-PRICE INFLATION 



At the same time, the West German experience il¬ 
lustrates that it is extremely difficult, and probably 
impossible, to maintain an unregulated, pluralistic, 
competitive health-insurance system that avoids ad¬ 
verse-risk selection and, at the same time, maintains 
horizontal equity in the financing and distribution of 
health care. 

The more freedom of choice is granted to those 
who purchase health insurance from a multitude of 
competing insurance carriers, the more opportunities 
there are for both the insured and the carriers to sort 
people into distinct risk classes, and the more inequi¬ 
table will the distribution of health care and its financ¬ 
ing, unless society were willing to subsidize the 
health-insurance premiums of high-risk, low-income 
persons with tax-financed subsidies. 


SOURCES OF FUNDS 



10 Alain Enthoven and Richard Kronick, “A Consumer-Choice Health 
Plan for the 1990s,” The New England Journal of Medicine, Vol. 320, January 
5, 1989, pp. 29-37 and vol. 320, January 12, 1989, pp. 94-101. 


16 







USES OF FUNDS 



CL 

Q 

0 

ll 

O 


UJ 

O 


CE 

UJ 

0 . 


DIRECT HEALTH-CARE EXPENDITURES, 1975-86 
AS A PERCENT OF GROSS DOMESTIC PRODUCT 



SOURCES AND REFERENCES 


AOK Bundesverband, “AOK Bilanz ’88: GRG verstaerkte den 
Ausgabenzuwachs,” DOK Politik, Praxis, Recht, vol. 12, June 15, 1989; pp. 
366-72. 

Bauer, Guntram and Schoenhofen, Franz, “Risikostrukturen und 
Beitragsunterschiede in der GKV,” Die Ortskranken-kasse, vol. 22, November 
15, 1988; pp. 649-55. 

Levit, Katherine R. and Freeland, Mark S., “National Medical Spending," 
Health Affairs, vol. 7, Winter, 1988, pp. 124-36. 

Reinhardt, Uwe E. Financing the Hospital The Experience Abroad, Report 
submitted to the Department of Health and Human Services, July, 1984. 

Reinhardt, Uwe E., “The Compensation of Physicians: Approaches used in 
Foreign Countries,” Quality Review Bulletin, vol. 11, December, 1985. 


Reiners, Hartmut, Ordnungspolitik im Gesundheitswesen, Bonn, West Ger¬ 
many: Wissenschaftliches Institut der Ortskrankenkassen, WIDO-Materialien 
No. 30, 1987. 

Sachverstaendigenrat fuer die Konzertierte Aktion im Gesundheitswesen, 
Medizinische und Oekonomische Orientierung Jahresgutachten 1988, Baden- 
Baden, West Germany: Nomos Verlagsgesellschaft, 1988. 

Schneider, Markus, Sommer, Juerg and Keceki, Aynur, Gesundheitssyteme 
im International Vergleich, Augsburg, West Germany: BASYS GmbH, 
1987. 

Verband der privaten Krankenversicherungen e.V., Die Private 
Krankenversicherung, Zahlenbericht 1987/1988. 


17 
















































EUROPE’S DECENTRALIZED AND SEMI-PRIVATE 

HEALTH INSURANCE 


William A. Glaser * 


OVERVIEW 

Several European countries have the health insur¬ 
ance arrangements most relevant for reform in the 
United States. Their characteristics are: 

• Administration of finance by private health insur¬ 
ance carriers. These are mutual aid societies or 
mutual insurance companies. Some have existed 
for centuries and antedate obligatory health insur¬ 
ance laws. They jealously guard their independ¬ 
ence from government. 

• These carriers compete for members and for 
prestige. 

• Many citizens—all, in some countries—have free¬ 
dom of choice among carriers. 

• Some citizens—many, in some countries—are free 
to self-insure completely. 

• Government’s role is limited. It does not dictate. 
A law of Parliament specifies the minimum bene¬ 
fits for subscribers. Parliament levies payroll 
taxes on employers and workers, since health 
insurance is part of the social security system. 
Government may subsidize the health insurance 
accounts from general revenue. Several Ministries 
set guidelines to contain costs within the fiscal 
capacity of the system. 

• Mechanisms exist to stabilize costs. 

• The working rules and fees of doctors are negoti¬ 
ated between the medical association and the 
health insurance carriers. These matters are never 
imposed on doctors unilaterally by government. 

• All big decisions are made through elaborate ne¬ 
gotiations and through compromise. The govern¬ 
ments themselves are ruled by coalition Cabinets, 
whose political parties differ in preferences about 
social insurance and about health care finance. 


* Report prepared by William A. Glaser, Department of Health Services 
Management. Graduate School of Management, New School for Social Re¬ 
search. New York, New York, September 1989. 


Germany 

Like the United States and Switzerland, it has a 
federal system of government. General frameworks 
are enacted by the national Parliament and by the na¬ 
tional Ministries, but the health insurance carriers and 
providers are organized distinctly in each province, 
producing diversity in levels of finance and in some 
administrative implementation. 

When first enacted a century ago, the law required 
certain occupational groups to join health insurance 
funds, it levied payroll taxes on the workers and their 
employers, and it listed benefits that the carriers must 
provide. Additional occupations were added to oblig¬ 
atory coverage in successive amendments to the law. 
The payroll taxes suffice to cover both the worker 
and his/her family. But obligatory coverage never 
became universal: one-fifth of the population over an 
earnings threshold can opt out completely. 

Once Germany had thousands of health insurance 
carriers of varying sizes. Most were for workers in in¬ 
dividual factories. Some enlisted all craftsmen (such as 
the butchers) in a city. Others enlisted all members of 
an industry (such as seamen) throughout the country. 
In each area there has been a general fund for anyone 
whose occupation does not assign him automatically 
to one of the occupationally based carriers. Besides all 
these, there are “substitute” funds for persons over an 
earnings threshold but not yet at the level where they 
are exempt from obligatory coverage. The number of 
carriers has greatly diminished, primarily because of 
bankruptcies and mergers among the workplace 
funds. 

Besides these social funds that receive and use pay¬ 
roll taxes, Germany has private insurance companies. 
If someone’s income exceeds the membership ceiling, 
he is exempt from the social insurance coverage but 


19 



may buy his health insurance from these commercial 
carriers voluntarily. 


The Netherlands 

Until reforms scheduled for the early 1990’s, Hol¬ 
land never had universal obligatory coverage. All 
persons below an earnings ceiling were required to 
join a social insurance carrier, financed by payroll 
taxes and government subsidies. Everyone above that 
ceiling had to seek private commercial insurance. The 
pensioners could choose either sector, usually were 
priced out of the private policies, and usually rejoined 
the social insurance carriers. After 1990, every¬ 
one will be covered by obligatory statutory health 
insurance. 

In the past, Holland had hundreds of small local 
social insurance funds. Some were created by doctors, 
some by trade unions, some by employers, others by 
Catholic associations. Any subscriber could choose 
any carrier. The social insurance funds steadily 
merged, and now usually there is only one in each lo¬ 
cality. All the separate federation offices have united 
into one national office that represents all carriers. 

In addition, there are several dozen nationwide 
mutual insurance companies that once specialized in 
selling policies to the persons over the earnings ceil¬ 
ing. In the 1990’s, when the entire population is cov¬ 
ered by statutory health insurance, the commercial 
carriers will serve this market too. Therefore, social 
insurance will again have competing carriers. 


Switzerland 

The country has never enacted nationwide obliga¬ 
tory health insurance. A few cantons require cover¬ 
age by persons under an earnings ceiling, but that is 
all. Therefore, most of the population can opt out and 
self-insure. 

Once Switzerland had over one thousand health in¬ 
surance carriers, but mergers have reduced the num¬ 
bers to less than four hundred. They are nonprofit 
mutual insurance companies or mutual aid societies. 
Some are nationwide, others are regional. Anyone can 
choose any carrier. 

Because health insurance is not part of the national 
government’s social security system, the carrier’s rev¬ 
enue does not consist of percentage-of-earnings pay¬ 
roll taxes. Each individual subscriber pays a monthly 
premium calculated by age and sex at time of first 


enrollment. There are no family policies. Because em¬ 
ployers contribute no payroll taxes, the national gov¬ 
ernment makes up the shortfall by contributing grants 
from general revenue. The subsidies vary by the 
number, age, and sex of each carrier’s subscribers. As 
a condition for receiving the grants, the carrier must 
follow rules about minimum benefits and maximum 
patient cost-sharing. The grants induce nearly every 
citizen to join, and they standardize the policies of the 
carriers. Through private and voluntary methods, 
Switzerland achieves the same results as those in 
countries with obligatory health insurance. 

Once the elderly, the very poor, and the unem¬ 
ployed were not covered by statutory or by voluntary 
health insurance. They were aided by municipal wel¬ 
fare offices—i.e., the European counterpart of Medi¬ 
caid—or they became bad debts in public hospitals. 
But now in all three countries, all the elderly, poor, 
and unemployed are obligatory enrollees in social in¬ 
surance funds. The voluntary market consists of upper 
income people who can fend for themselves. 

Patterns of coverage in 1985—shortly before Hol¬ 
land adopted universal statutory coverage—were: 


Basic acute-care coverage 

West 

Germany 

Holland 

Switzer¬ 

land 

Social insurance funds: 




Obligatory by law. 

79% 

51% 

25% 

Voluntary. 

12 

19 

71 

Private insurance companies. 

7 

30 

2 

Not insured. 

2 

0.1 

2 


100% 

100% 

100% 

(Total population in millions) 

(61) 

(14) 

(6.4) 


CHOICE AND COMPETITION 

Any widespread statutory program inevitably has 
many standard features. Minimum benefits are univer¬ 
sal. The payroll tax rate is usually (not always) identi¬ 
cal for all carriers and all subscribers. Often patient 
cost-sharing rules and provider balance-billing rules 
are universal. Since carriers use tax money and (often) 
public subsidies, all must accept certain rules of finan¬ 
cial management. Usually carriers under tax-supported 
social insurance must be nonprofit. 


Among Social Insurance Carriers 

Nevertheless, the obligatory subscriber in all three 
of the countries can choose among the carriers for his 


20 













basic statutory coverage. And the carriers can com¬ 
pete for the largest numbers of the most desirable 
subscribers. 

Where they have a choice, subscribers prefer social 
insurance carriers with the following characteristics: 

• More benefits without asking for higher payroll 
taxes (in countries with variable payroll taxes, 
like Germany); without asking for supplementary 
premiums (in countries with fixed payroll taxes, 
like Holland); and without asking for higher pre¬ 
miums (in countries with a variable premium 
system, like Switzerland). 

• Better services for patients, such as responsive in¬ 
formation staffs, health publications, and fast 
processing of claims. 

• Attractive public image. 

A social insurance carrier in such a competitive 
market seeks subscribers who will yield financial sur¬ 
pluses: higher incomes and higher payroll tax yields in 
countries with payroll taxes (like Germany and Hol¬ 
land); and lower morbidity. They try to attract such 
desirable subscribers by various appeals: 

• More benefits without charging higher premiums: 
higher allowances for private hospital rooms; 
more generous dental coverage; lower cost-shar¬ 
ing (for dentistry, drugs, etc.) if this is allowed 
under the law; inducing better service by doctors 
by offering higher fees (a method used only by 
the “substitute” carriers Ersatzkassen in Germany 
because of a loophole in the system of negotiat¬ 
ing fees). 

• Lower payroll taxes and premiums in countries 
where the rates are flexible (Germany and Swit¬ 
zerland). It is rarely done to attract subscribers in 
the social insurance market, since the carriers 
prefer to offer better benefits. 

• Image and prestige. Used by the Ersatzkassen of 
Germany to attract the white-collar workers and 
managers who otherwise could choose the work¬ 
place or regional carriers traditionally identified 
with labor. In the past in Holland and in Belgium 
today, some mutual assistance funds are associ¬ 
ated with the Catholic Church and the Socialist 
Party, and they appeal to Catholics and socialists. 

• Better services for subscribers are a very 
common marketing method. 

While subscriber choice and carrier competition 
exist in the social insurance market, all-out competi¬ 
tion is limited for several reasons. (In contrast, greater 
competition is possible in the private health insurance 
market, to be described in later paragraphs.) 


• The law guarantees certain benefits for all per¬ 
sons. While competing carriers can add benefits, 
they cannot reduce them, they cannot offer poli¬ 
cies with lower premiums for fewer benefits. 
Usually the law prevents them from offering poli¬ 
cies with lower premiums in return for higher pa¬ 
tient cost-sharing. 

• Social insurance carriers need to earn money 
over the actuarial costs of the workers paying 
payroll taxes and premiums. They are obligated 
to accept pensioners, the poor, and the un¬ 
employed whose payments to the carrier are 
much lower than their costs. Therefore, 
social insurance financing must be redistributive. 
The carriers cannot compete for subscribers by 
price-cutting that lowers revenue. 

• Some features of administration and finance lock 
the subscriber into one carrier and inhibit free 
choice and carrier competition. For example, 
Swiss social insurance carriers charge age-of- 
entry lifetime premiums that increase as the 
subscriber ages. Level premiums cover lifetime 
actuarial costs by overcharging the subscriber 
while he is young and undercharging him while 
he is old. Carriers compete by offering different 
rates for the same age of entry. If a subscriber 
wishes to change carriers, he joins the new one at 
the starting rate for his current age, which prob¬ 
ably exceeds the rate he currently pays his origi¬ 
nal carrier. Consequently, he usually hesitates to 
change. The Swiss social insurance market there¬ 
fore has much less competition and fewer trans¬ 
fers than one might expect. The lifetime premium 
system has the important advantage of protecting 
persons from prohibitive increases in old age. 

Competing social insurance carriers would prefer to 
avoid attracting subscribers who will cause deficits: 
persons with lower incomes and lower payments 
(such as the pensioners and the poor); and persons 
with higher morbidity. However, in practice the car¬ 
riers can only woo the better risks, not screen out the 
less healthy persons. These are social security pro¬ 
grams designed to protect the vulnerable by redis¬ 
tributive financing, and the carriers are expected to 
fulfill their duties. They cannot reject any applicant 
under social insurance, no matter how poor a risk, 
and they can do no medical underwriting of rates. 
The carriers take the long view: they woo young sub¬ 
scribers who yield financial surpluses, they use mar¬ 
keting appeals to keep these subscribers during their 
productive work years, and they cover these sub¬ 
scribers’ high costs in old age. The strategy assumes a 
steady recruitment of young new subscribers. If the 
carrier’s portfolio ages—as in the case of funds with 
blue collar workers in declining industries in Ger- 


21 


many now and in Holland in the past—the carriers 
can go bankrupt. 


Between Social Insurance Carriers and 
Private Insurance Companies 

Over an earnings ceiling in Germany today and in 
Holland until the 1990’s, certain classes of subscribers 
have had to buy statutory health insurance but may 
buy it from either the social funds or the private com¬ 
panies. Under either arrangement, the subscriber and 
his employer pay the standard payroll taxes. 

As in the aforementioned choices among social in¬ 
surance funds, the subscriber prefers a carrier that 
offers more benefits, better services, and an attractive 
public image. In addition, this category of persons 
prefers carriers that charge lower premiums, even if 
the benefit package is thinner. These people are 
younger, healthier, less at risk, and reluctant to pay 
extra cash to cover the costs of the worst risks. 

The private carriers appeal to this group by offer¬ 
ing lower payroll taxes (or premiums) and/or better 
benefits. They select preferred risks and have fewer 
expensive subscribers than the social insurance funds 
do. 

This competition and the preferred risk selection 
arouse protests by the social insurance carriers and by 
the political Left: the social carriers are left with the 
elderly and other bad risks, and they run deficits; the 
private carriers do not share the burden of a sup¬ 
posedly universal social program; the taxpayer should 
not be forced to rescue the social insurance funds 
with subsidies, while the private carriers waste 
money, say the critics. Whether reforms take place 
depends—like many other health policies—on the po¬ 
litical decisions of the government-of-the-day: 

• The Center-Right Cabinet in The Netherlands 
during the 1980’s amended the health insurance 
law and required the private health insurance 
carriers to keep their members after retirement. 
These companies can no longer force the elderly 
to transfer back to the overburdened and subsi¬ 
dized social insurance carriers, by charging them 
very high age-related premiums. 

• In order to avoid punitive actions, the association 
of private health insurance funds in Holland has 
given the association of social insurance carriers 
several lump sums to cover the bad risks and el¬ 
derly subscribers that the private carriers avoid 
recruiting and once avoided keeping. 

• All the Dutch political parties agreed to amend 
the law in the late 1980’s, making statutory health 


insurance universal. Holland therefore ceases to 
be the last European country with a large un¬ 
regulated private market, with benefits and pre¬ 
miums selected by the subscribers according to 
their own self-interest. Every Dutch citizen is 
now covered by payroll taxes, every social insur¬ 
ance fund and all private companies become car¬ 
riers for basic benefits, every citizen has free 
choice of carrier, preferred risk selection by a 
carrier is banned, and the extra cash collected 
from the better paid persons covers the extra 
costs of the elderly and of the bad risks. 

• None of these remedial measures have been 
adopted in Germany. Healthier risks steadily and 
voluntarily move to the “substitute” funds 
(Ersatzkassen) from the workplace funds 

(Betriebskrankenkassen) and from the regional 
funds (Ortskrankenkassen). As a result, many 
workplace funds run deficits and close; and the 
regional funds must charge higher payroll taxes 
and offer lower benefits than the substitute funds 
do. Legislative reform is blocked by the fact that 
the political party allied with the substitute funds 
(the Free Democratic Party) has been part of 
every coalition government in the national and 
most provincial governments for twenty years. 


Among Private Insurance Companies 

In these arrangements, one type of private market 
sells basic coverage to the upper income persons 
exempt from obligatory insurance, as in Germany 
today and in Holland until the 1990’s. (Such a sepa¬ 
rate private market for basic coverage does not exist 
in Switzerland, since all Swiss get basic benefits— 
obligatorily or voluntarily—from the mainstream car¬ 
riers who receive grants from government.) Another 
type of private market sells voluntary supplementary 
policies for those benefits not provided by statutory 
social insurance. It exists in all European countries, 
will survive in The Netherlands, is targeted at all per¬ 
sons, covers many people in some countries (such as 
France), but is purchased only by the wealthy in most 
countries. 

Both of these private markets are very competitive, 
and subscribers do considerable shopping. Since these 
markets are not part of social insurance financed by 
payroll taxes and public subsidies, the subscriber pays 
his own cash. He may get a voluntary subsidy from 
his employer, but private employer group insurance— 
common in the United States and in private insurance 
in Great Britain—is rare in Europe. Subscribers prefer 
private policies with the following characteristics: 


22 


• Lower premiums. Since they are affluent, they 
can afford higher cost-sharing (in return for 
lower premiums) and can afford to self-insure for 
routine services (such as general practice and 
pharmaceuticals). 

• Adequate coverage of big risks. 

• Coverage of specialists’ fees. The patient is then 
guaranteed personal attention from the chief of 
service when he is hospitalized. Social insurance 
covers hospitalization in general and care by the 
entire medical staff. 

• Some new benefits attract subscribers, such as 
dentistry and long-term care. 

The private insurance companies compete with the 
following offers: 

• Lower premiums, particularly aimed at the 
young. Bursts of competitive price-cutting occur, 
preventing established private insurers from com¬ 
munity rating and eliminating extra cash to cover 
the elderly redistributively. 

• A great variety of options, particularly policies 
with schedules of lower premiums for greater pa¬ 
tient cost-sharing. 

• Limited policies that omit general practice. 

• Development of policies and literature making 
each company’s offers appear unique and hinder¬ 
ing consumers’ comparisons among companies. 

• Some benefits exceeding those of other compa¬ 
nies, such as more generous coverage of physi¬ 
cians’ fees. 

• Occasionally individual companies offer com¬ 
pletely new policies, such as coverage of 
long-term care. However, others quickly follow. 
Because regulatory bodies discourage undue in¬ 
surance risk that will ruin the company and 
strand subscribers, the association of private in¬ 
surance firms may design new packages for the 
entire industry. The companies then compete 
over variants and over price. 


COMMUNITY BEARING OF RISKS 

Every European statutory health insurance arrange¬ 
ment is part of the larger social security system, and 
the entire package is permeated by the vocabulary 
and spirit of “social solidarity.” None of these coun¬ 
tries are “socialist” in government or in economies: 
private enterprise, the pursuit of individual gain, and 
wide variations in income characterize their societies. 

But health care financing differs and is designed to 
protect the vulnerable through redistribution: 


• The poor, disabled, and elderly are guaranteed 
mainstream coverage under insurance. Public 
charity has been phased out. 

• The healthy and wealthy pay into the social in¬ 
surance funds payroll taxes or premiums higher 
than their actuarial costs, to provide extra cash 
for the bad risks. 

• Governments use general tax revenue—based on 
progressive income and business taxes—to subsi¬ 
dize the social insurance carriers. 

• In a few countries (such as France, Belgium, and 
Holland), the health insurance carriers with extra 
cash transfer some insurance revenue to the car¬ 
riers with deficits. 

• Price-cutting competition that would enable the 
rich and healthy to keep their cash and that 
would underfund the system is reduced by law or 
by regulation. 

The trend is toward making the social insurance 
system a single pool. Any person (no matter how old 
or how unhealthy) can pick any carrier. No social in¬ 
surance fund can reject an applicant, can charge an 
extra risk-related premium, or can force out a long¬ 
time subscriber after retirement. Each carrier is ex¬ 
pected to raise enough cash to cover the bad as well 
as the good risks; only after that can it cut premiums 
or add extra benefits as competitive tactics to attract 
the healthier, richer, and more profitable subscribers. 
If a carrier faces deficits because of its portfolio, it is 
merged or subsidized. Party politics (and, ultimately, 
the configuration of interest groups) determines the 
timetable: this trend was achieved long ago in some 
countries with statutory health insurance (such as 
France and Belgium), is being implemented only now 
in Holland, and still has not yet been fully adopted as 
public policy in Germany. 


COST CONTAINMENT 

Government can announce and enforce levels of 
costs where its general budget pays all providers— 
such as in Great Britain, Sweden, and Canada. But it 
cannot dictate total spending so easily in countries 
with statutory health insurance, since the carriers are 
autonomous, the providers are private, every sub¬ 
scriber is guaranteed access to all benefits without 
waiting, and doctors have complete authority to 
decide patients’ needs and to prescribe care. 

For many years, countries with statutory health in¬ 
surance let patient demand, doctors’ judgments, and 
provider prices determine costs. Payroll taxes were 
steadily increased, the earnings ceilings for the payroll 
taxes were eliminated in a few countries (France and 


23 


Belgium), and governments added subsidies to cover 
the deficits resulting from full coverage of the elderly 
and unemployed. Costs had to be controlled, since the 
payroll taxes became burdensome and governments 
had to curb their subsidies. But government had lim¬ 
ited power over health insurance, carriers, and pro¬ 
viders. Therefore, an elaborate system of negotiation 
among government Ministries, payers and providers 
has evolved to set and implement expenditure targets. 
Procedures differ among these countries, but all have 
multi-centered negotiations. 


Setting Expenditure Targets 

An “expenditure target” is a voluntary agreement 
among payers, providers and government to try to 
hold health care spending at a specified level for a 
specified time. A target may refer to all health care, 
health care traditionally covered by third parties, or a 
specific health care service (such as physicians, hospi¬ 
tals, pharmaceuticals, or laboratory tests). 

An expenditure target states fiscal or budgetary 
goals that providers and payers voluntarily try to 
achieve. Expenditure targets are frequently agreed 
upon in order to obviate the need for government 
controls. An “expenditure cap,” on the other hand, is 
a fixed amount of money allocated to a particular 
sector or to individual providers by government or by 
insurance carriers. 

Expenditure targets are used to contain costs in 
European statutory health insurance. Expenditure 
caps are used in systems entirely financed by govern¬ 
ment, as in Canada, Great Britain, and Scandinavia. 
One of the few uses of fixed caps under health insur¬ 
ance is the payment of doctors in Germany from time 
to time, to be mentioned below. 

The setting of expenditure targets—like everything 
else in European health insurance—results from nego¬ 
tiations among all the interested factions: 

• In Holland, Belgium, France, and many Swiss 
cantons, the guidelines are negotiated among the 
Ministries of Social Affairs, Health, Budget, and 
Finance. Each Ministry is influenced by various 
interest groups in the population and by different 
factions in the governing coalition: Social Affairs 
(which usually directs the social security system) 
speaks for the trade unions, the health insurance 
carriers, and the left wings of the political parties 
in the governing coalition; Health speaks for pro¬ 
viders (particularly hospitals), the workers in 
health, and patients; Budget must balance the de¬ 
mands from all Ministries, from all existing 


government programs, and from the governing 
coalition’s new proposals; Budget must minimize 
public subsidies to health insurance; Finance tries 
to avoid raising payroll and other taxes; Finance 
in practice represents business interests in expend¬ 
iture and social policies. Each Ministry develops 
its case for higher or lower health spending with 
the help of its own statisticians. Once viewpoints 
diverged and Prime Ministers often had to medi¬ 
ate. But now everyone agrees that increases in 
payroll taxes and public subsidies should be 
avoided, all the Ministries agree on basic facts 
(particularly the expected yield of the payroll 
taxes next year), and all the Ministries agree on 
this expenditure target. 

• In Germany, a standing forum represents all the 
interest groups, viz., the associations for doctors, 
hospitals, dentists, and pharmaceuticals; the busi¬ 
ness associations; the trade unions; the health in¬ 
surance carriers; and others. It meets at least 
once a year and is called the Konzertierte Aktion 
im Gesundheitswesens. A staff from the Ministry 
of Labor provides data, particularly about the ex¬ 
pected yield of payroll taxes. A committee of 
neutral experts—chiefly university professors— 
prepares options papers and special reports. The 
forum negotiates annual expenditure targets in all 
health sectors, usually within the expected fiscal 
capacity of the payroll taxes. 


Hospitals 

Payment under statutory health insurance in all 
countries uses all-payer rates. Since every hospital has 
its unique costs, it has its own rates, calculated to pro¬ 
vide enough revenue to cover its budget, approved 
prospectively by the following methods: 

• Germany’s model of private negotiations is ex¬ 
tended to the determination of its hospital rates. 
Every German hospital seeking reimbursement 
under statutory health insurance must fill out a 
retrospective cost report and a prospective 
budget every year, covering the hospital’s entire 
business. The required information is specified in 
a law of Parliament. The forms are written by 
the staff of the Ministry of Labor, after consul¬ 
tation with the national association of hospitals 
and the national associations of health insurance 
carriers. Each hospital (backed up by its provin¬ 
cial hospital association) submits its proposed 
prospective budget for next year to a joint 
bargaining committee of the local health 
insurance carriers. They argue over the hospi¬ 
tal’s performance and needs. Usually they com¬ 
promise over a daily rate that will cover the 


24 


hospital’s costs next year and that binds all the 
carriers. In case of deadlocks, the hospital and 
carriers create an arbitration committee, which 
usually awards an increase pursuant to the ex¬ 
penditure target recommended by the Konzertierte 
Aktioru 

• In most countries with statutory health insurance 
(such as Holland, Switzerland, France, and Bel¬ 
gium), the hospital’s rates are set by investigators 
employed by government. They are impartial ex¬ 
perts respected by all; they are essential because 
of the complexity of the subject and because they 
alone can compel production of the hospital’s 
books in order to verify the hospital’s statements 
of its financial needs. The regulator analyzes the 
hospital’s prospective budget pursuant to detailed 
guidelines and expenditure targets sent down by 
the national Ministries. The local health insurance 
carriers also receive the hospital’s prospective 
budget and retrospective cost reports, and they 
provide advice about the efficiency and quality of 
the hospital’s past work, the hospital’s need for 
its entire request. The hospital can appeal denials 
to the higher ranks of the regulatory commission 
(in Holland) or the higher ranks of the Ministry 
(in France, Switzerland, and Belgium). 

Expensive high-tech programs can no longer prolif¬ 
erate around the country, fueling cost explosions. In 
most countries with statutory health insurance, gov¬ 
ernment plays an important role by providing capital 
grants for new buildings and advanced new technol¬ 
ogy. Particularly in their early stages, governments 
try to limit the expensive programs to major centers 
with expert clinical staffs and high utilization. Dupli¬ 
cation and low utilization are avoided. The rate regu¬ 
lators will not allow the social insurance carriers to 
pay the operating costs of unapproved programs. 

Holland is one of the very few countries which 
(like the United States) allows its hospitals to borrow 
in the capital market, buy whatever they want, and 
amortize the capital costs in their operating budgets. 
Once the rate regulators were permissive. Now they 
are tightening approval of the operating and capital 
costs for high-tech. 

Because government has limited power under statu¬ 
tory health insurance, because the hospitals are pri¬ 
vate or municipal, and because the hospitals have 
much political influence (usually in the political par¬ 
ties of the Center), hospital facilities planning is often 
weak. It is difficult to force hospitals to reduce beds 
or to close. 


Doctors 

The guidelines about costs are implemented as fol¬ 
lows: 

• Fees and other rules of practice under statutory 
health insurance are always negotiated every 
year between the medical associations and a joint 
bargaining committee from the associations of 
health insurance carriers. Because of the wording 
of the law and the need to win the cooperation 
of the doctors, government never dictates the 
physicians’ pay. Most countries settle doctors’ 
pay at the national level, but the Swiss negotia¬ 
tions occur in each canton. The fee schedules and 
other agreements apply to all payers except for 
the small market for private insurance and pri¬ 
vate out-of-pockets. Because rising utilization and 
service intensity have increased their medical 
services costs, the health insurance carriers now 
grant only small increases in fees. The carriers 
invoke the expenditure targets and argue that 
trends in utilization and service intensity threaten 
them with deficits. The annual negotiations over 
fees are often disputatious, but the medical asso¬ 
ciations usually settle, because they know that the 
sickness funds cannot grant more money than the 
probable fiscal yield of the payroll taxes, and be¬ 
cause doctors’ earnings rise as utilization and 
service intensity grow, even when the fees them¬ 
selves (i.e., the “conversion factors”) rise little. 
The medical associations can demand arbitration 
by government but usually don’t: they will lose 
an appeal nowadays, since their incomes rise sub¬ 
stantially from utilization and service intensity 
even when their fees rise little, and since all po¬ 
litical parties (even the conservatives) and the 
government’s finance officers expect such an af¬ 
fluent occupation to accept restraint. 

Balance billing is illegal under statutory health in¬ 
surance in some countries (such as Holland and Swit¬ 
zerland). It is allowed in a few countries under the 
social insurance contracts (such as France and Bel¬ 
gium). But it is infrequent: doctors usually extra-bill 
only the wealthier patients. 

• Utilization and service intensity are difficult to 
limit. Doctors have full authority under the laws 
of medical practice and social insurance to pre¬ 
scribe whatever they think the patient needs, and 
the health insurance carriers are obligated to pay. 
Health insurance carriers collect the claims data, 
create statistical profiles, identify some deviants 
who seem to file too many claims, and employ 
control doctors to caution the overbillers. But 
these methods have been hesitant and ineffective. 
Health insurance carriers and medical associa- 


25 


tions in some countries (such as France and Bel¬ 
gium) now try to implement effective utilization 
review as part of the joint negotiating machinery. 

In Germany, the health insurance associations turn 
over both the money and the utilization review task 
completely to the medical association. The German 
method—used at times of strict cost containment— 
represents the only fixed expenditure cap over physi¬ 
cians’ reimbursement under statutory health insurance, 
but it is administered completely by the doctors them¬ 
selves. Under this system, the doctor is not guaran¬ 
teed the same fee throughout the year. If utilization 
and service intensity rise faster than expected so that 
the account faces deficits, the managers reduce the 
fees for new claims. In countries with targets rather 
than caps, the insurance carriers pay all claims in full, 
reallocate or borrow to cover the excess over the ex¬ 
penditure target, and limit more strictly their conces¬ 
sions to the doctors in next year’s negotiations. 


Pharmaceutical Drugs 

Governments play a larger role, since the health in¬ 
surance carriers cannot cope by themselves with such 
a powerful and complicated industry. Although a 
smaller proportion of total health care costs than hos¬ 
pital and physician spending, drugs grow too. 

• All governments license drugs to ensure safety. 
Some regulate prices for all citizens. 

• Most countries with statutory health insurance 
have formularies limiting the number of drugs to 
be reimbursed under the programs. 

• All countries require patients to pay some of the 
drug costs under social insurance, to discourage 
over-prescription and waste. 

• Utilization is difficult to control, since all doctors 
have the right to prescribe what they think best, 
the newest drugs are very expensive, and the car¬ 
riers are obligated to pay. At best, various regula¬ 
tions and financial incentives try to persuade 
doctors, pharmacists, and patients to prefer the 
less expensive generic substitute. 


26 


CONTROLLING HEALTH CARE COSTS 


Mark Merlis * 


ABSTRACT 

Concerns about rapid growth in U.S. medical ex¬ 
penditures have led to a variety of proposals for con¬ 
trolling health care costs. This report reviews current 
health care cost control proposals, including both reg¬ 
ulatory and competitive options. The report provides 
an overview of the concepts underlying these basic 
approaches and the evidence available about their 
ability to achieve savings and their potential impact 
on access and quality of care. 


SUMMARY 

Inflation in the medical sector has outpaced infla¬ 
tion in the rest of the economy for many years. There 
are concerns that continued growth in health care 
costs could impede efforts to improve access to health 
care and could eventually erode the access that al¬ 
ready exists. While efforts to control medical spend¬ 
ing have been a central issue in health policy at least 
since the early 1970s, these concerns have given the 
issue a new urgency. 

Most proposals to limit health care spending have 
relied on one of four basic approaches. The first is to 
change the behavior of consumers by holding them 
directly responsible for a larger portion of the costs of 
their own care. Increases in required deductible and 
coinsurance payments by enrollees in health plans can 
reduce overall costs. However, they may have a 
disproportionate impact on low-income persons, de¬ 
terring even necessary care, and may not affect the 
treatment decisions of providers, who control much 
of total health spending. 

The second major approach is to change provider 
behavior through direct modification of medical prac¬ 


* Report prepared by Mark Merlis, Specialist in Social Legislation, Educa¬ 
tion and Public Welfare Division, Congressional Research Service, January 
26, 1990. 


tice, or by controlling the overall supply of medical 
resources. Insurers have had some success in control¬ 
ling inpatient hospital services through external 
review systems, but savings have been largely offset 
by a growth in outpatient services. These have 
proved harder to manage, in part because there is 
little agreement about what constitutes appropriate 
care. There are hopes that further research on the 
effectiveness of medical treatments can provide a basis 
for limiting unnecessary care. If reductions in utiliza¬ 
tion are to achieve their full savings potential, how¬ 
ever, they may need to be accompanied by controls 
on the overall supply of medical resources. Supply 
controls through local health planning systems were 
attempted in the 1970s, but encountered political bar¬ 
riers and had limited success. 

The third cost control approach is to change pro¬ 
vider behavior through reimbursement systems that 
provide incentives for greater efficiency. Several 
States, as well as Canada and other nations, have 
adopted payment systems that fix in advance the re¬ 
sources a provider can consume in treating an indi¬ 
vidual patient or an entire patient population. These 
systems may encourage more cost-effective treatment, 
but may also delay the introduction of new medical 
technologies or otherwise compromise quality. Their 
long-term potential for cost savings may rest on the 
willingness of the public to accept trade-offs between 
cost and other priorities. 

The last major approach is to encourage consumers 
to choose from among multiple health plans that com¬ 
pete on the basis of their ability to develop structured 
and efficient delivery systems. Health maintenance or¬ 
ganizations (HMOs) and other managed care systems 
have shown some ability to control costs, using utili¬ 
zation controls, financial incentives for providers, and 
other methods. The ability of these programs to 
achieve their full savings potential may be limited by 
the reluctance of higher-cost patients to accept the re¬ 
strictions on choice of providers imposed by HMOs. 


27 


28-861 - 90 - 2 : QL 3 



INTRODUCTION 

The United States spends more per capita, and a 
greater proportion of its gross domestic product 
(GDP), on medical care than any other industrialized 
nation. U.S. health expenditures in 1987 reached $500 
billion, 11.1 percent of GDP, as compared to 8.6 per¬ 
cent in Canada, 6.8 percent in Japan, and 6.1 percent 
in the United Kingdom. 1 Despite its higher expendi¬ 
tures, the United States performs no better than other 
industrialized nations, and worse than many, on such 
measures of health care outcomes as life expectancy 
or infant mortality rates. These international compari¬ 
sons have led many observers to conclude that our 
medical care system is much less efficient than those 
elsewhere, spending more for less. 

Not everyone would agree. Gross measures of 
health status may reflect, not the relative efficiency of 
our medical care system, but other differences be¬ 
tween the United States and other countries. Life 
expectancy, for example, may be tied to diet or envi¬ 
ronment, while infant mortality rates may in pan re¬ 
flect such factors as the rate of teenage pregnancy. 
Other aspects of quality may not be captured by these 
measures at all. For example, Americans (or at least 
insured Americans) may have greater access to ad¬ 
vances in medical technology than persons in other 
countries or may be less likely to have to wait for 
non-emergency treatment. Assessing the efficiency of 
the American system depends in pan on how one de¬ 
fines quality, a problem that will be considered fur¬ 
ther at the end of this report. 

Whatever the relative quality of American medical 
care, there are concerns about the rate at which 
health expenditures are increasing. Inflation in the 
medical sector has outpaced inflation in the rest of the 
economy for many years. National health expendi¬ 
tures rose an average of 13 percent a year from 1970 
through 1981. The rate of growth declined over the 
next several years, chiefly because of a decline in in¬ 
patient hospital admissions. Between 1984 and 1985 
total costs rose just 7.9 percent, the lowest annual rate 
of increase since the enactment of Medicare and Med¬ 
icaid in 1965 (though still greater than the growth in 
GDP). This moderation in expenditure growth 
proved short-lived. Costs rose 9.8 percent in 1987, 
and employers and insurers have reported dramatic 
cost increases over the next 2 years. For example, one 
recent survey has found that employers’ average cost 
per employee for health benefits rose 19 percent in 
1988. 2 


1 George J. Schieber and Jean-Pierre Pouilier. "International Health Care 
Expenditure Trends: 1987,” Health Affairs 8 (3) (Fall 19S9V 169-1 'Here¬ 
after cited as International Health Care Expenditure Trends: 198'.) 

* Jerry Geisel. "Health Benefit Tab Rises 19^ to New High.' B-^Jzness In¬ 
surance (December 11, 1989): 1. 


The return of double-digit medical care inflation 
after a temporary respite has led to concerns that 
continued growth in medical care costs could impede 
efforts to improve access to health care and could 
eventually erode the access that already exists. Many 
employers have already reduced their contribution to 
employees’ insurance expenses, while the costs of 
public insurance progr ams are consuming an increas¬ 
ing share of State and Federal budgets. Proposals to 
extend coverage to the uninsured have raised con¬ 
cerns that any expansion of the insured population 
might lend a further impetus to medical care inflation, 
as did the enactment of Medicare and Medicaid in 
1965. While the issue of health care costs and wav’s of 
controlling them has been a central one in health 
policy at least since the early 1970s, these recent de¬ 
velopments have given the issue a new urgency. 

This report examines policy options for controlling 
the increase in health care costs by modifying the 
way medical care is delivered or financed. Most pro¬ 
posals have relied on one of four basic approaches: 

• Changing the behavior of consumers by holding 
them directly responsible for a larger portion of 
the costs of their own care: 

• Changing provider behavior through direct modi¬ 
fication of medical practice, or by controlling the 
overall supply of medical resources; 

• Changing provider behavior through reimburse¬ 
ment systems that provide incentives for greater 
efficiency; 

• Changing the behavior of both providers and 
consumers by encouraging consumers to choose 
from among multiple health plans that compete 
on the basis of their ability to develop structured 
and efficient delivery systems. 

The remainder of this report provides an overview 
of the concepts underlying these basic approaches and 
the evidence available about their ability to achieve 
savings and their potential impact on access and qual¬ 
ity of care. The greatest attention is devoted to the 
last of the four strategies, competition, because this 
approach has dominated policy discussion in recent 
years. 

The report does not consider changes outside the 
health care delivery system that could directly or in¬ 
directly affect medical care expenditures. For ex¬ 
ample, the incidence of illness or injury might be 
reduced through public health or health education 
measures, stronger environmental controls, or im¬ 
proved safety regulation. Changes in the civil litiga¬ 
tion system (i.e.. malpractice reform) could reduce the 
practice of “defensive medicine” that is alleged to 


28 




result in the performance of unnecessary tests or pro¬ 
cedures. Such measures might well play an important 
role in any comprehensive initiative to control medi¬ 
cal care spending. They are omitted in order to allow 
this report to focus more directly on the medical care 
system itself and on proposals to change the way con¬ 
sumers and providers behave within that system. 


Cost Sharing 

Proposals to hold consumers responsible for more 
of the costs of their own medical care begin with the 
premise that comprehensive insurance coverage, 
largely funded by employers or government, has dis¬ 
torted the health care market by freeing consumers of 
any need to consider the utility or price of the serv¬ 
ices they are consuming. W hil e not all observers share 
the view that growth in health care costs is driven by 
consumer choices, there are increasing calls for meas¬ 
ures to encourage consumers to become more con¬ 
scious of the price and utility of the medical services 
they use. 

There are two broad ways of doing so. The first is 
to require consumers to pay a higher share of the pre¬ 
miums for their health care coverage, thus giving 
them an incentive to choose the most efficiently oper¬ 
ated plan. This approach is the subject of the fmal 
section of this memorandum. The second method, 
considered in this section, is to make consumers pay 
more of the direct costs of the services they use by 
increasing the deductibles or coinsurance payments 
required under their insurance plans. 

Increases in enrollee cost-sharing responsibility can 
reduce overall medical expenditures only if they deter 
some enrollees from obtaining care. Otherwise, they 
merely shift expenses from the insurer to the 
consumer. 3 The major study of the impact of cost¬ 
sharing on health care utilization and costs was the 
Health Insurance Experiment (HIE) conducted be¬ 
tween 1974 and 1982 by the RAND Corporation, 
under contract to the Health Care Financing Admin¬ 
istration. The HIE randomly assigned 7,700 enrollees 
to a variety of health insurance plans, including a plan 
that included no cost-sharing (the “free” plan) and 
plans requiring coinsurance payments ranging from 25 
to 95 percent (subject to overall limits on out-of- 
pocket expenditures). 

3 Deductibles have other behavioral effects that may also produce cost 
savings. Enrollees whose costs during a year exceed the deductible by only a 
small margin may not go to the trouble of filing a claim. Other enrollees who 
are careless in record-keeping may be unable to document all of their out-of- 
pocket expenditures and may therefore spend more than the nominal deduct¬ 
ible before the insurance takes over. 


The key findings of the HIE were these: 4 

• Cost-sharing reduced the probability that individ¬ 
uals would seek care for any particular medical 
condition. The strongest deterrent effects oc¬ 
curred among the poor, especially poor children. 
They were at least 40 percent less likely to obtain 
care for a given condition than children in the 
free plan. 

• Cost-sharing deterred enrollees from obtaining 
both “appropriate” and “inappropriate” medical 
care. Low-income enrollees in the cost-sharing 
plans were less likely to seek care for conditions 
for which medical care is highly effective, as 
well as for conditions for which medical care is 
rarely effective. Those in the cost-sharing plans 
had worse outcomes for specific conditions (such 
as hypertension) that can be improved by medical 
treatment. 

• While cost-sharing prevented enrollees from initi¬ 
ating an episode of medical care, it did not 
change the course of treatment once an indi¬ 
vidual had entered the medical care system. 
Within any given episode of care, the cost-shar¬ 
ing enrollees received the same services and 
medications as other patients. 

These findings raise several important concerns 
about the utility of cost-sharing as an approach for re¬ 
ducing medical expenditures. First, as would be ex¬ 
pected, its impact is greatest on enrollees with the 
least income. This effect might be modified by devel¬ 
oping cost-sharing requirements that varied by 
income. Such a system might be administratively 
cumbersome for employers or insurers. It might also 
defeat its own purpose, since cost-sharing may not 
reduce utilization unless it is financially burdensome. 
(The HIE enrollees in the least burdensome cost-shar¬ 
ing plan actually incurred slightly higher costs than 
those in the free plan.) 

Second, cost-sharing may deter necessary as well as 
unnecessary care. The goal of making consumers 
more prudent in their use of health services may 
demand a degree of sophistication about the value of 
different services that not all enrollees possess. There 
have been attempts to develop more carefully tar¬ 
geted cost-sharing systems, to control only inappro¬ 
priate utilization or to channel utilization in particular 
ways. For example, a higher coinsurance amount may 
be imposed for emergency room visits, in order to 


4 This summary is drawn from Kathleen Lohr, et al., “Use of Medical 
Care in the RAND Health Insurance Experiment: Diagnosis and Service- 
Specific Analyses in a Randomized Controlled Trial,” Medical Care 24 (9) 
(Supplement) (September 1986): S74-S77; and Robert H. Brook, et al., “Does 
Free Care Improve Adults’ Health?: Results From a Randomized Controlled 
Trial," New England Journal of Medicine 309 (23) (December 8, 1983): 1426- 
1434. 


29 





prevent enrollees from using the emergency room for 
non-urgent care; this approach is common in health 
maintenance organizations (HMOs) and has been 
adopted by some State Medicaid plans. It is not cer¬ 
tain, however, that even such narrower measures will 
deter only unnecessary care. 

Finally, and perhaps most important from the per¬ 
spective of cost reduction, cost-sharing may not 
modify the course of care once treatment has begun, 
presumably because the decision-making has generally 
shifted from the patient to the physician. This finding 
of the HIE is partly a result of the design of the ex¬ 
periment. Regardless of the level of cost-sharing re¬ 
quired, each plan had an out-of-pocket limit, a point 
beyond which the insurer assumed full responsibility 
for all further expenses. In the absence of such a limit, 
enrollees might have been more likely to decline the 
services ordered by their physicians. At the same 
time, however, the most severely ill would have been 
subject to catastrophic financial losses. 

Most medical care costs are incurred by a small mi¬ 
nority of patients. 5 A cost-sharing system without cat¬ 
astrophic limits will leave that minority unprotected, 
while a system with limits on out-of-pocket expenses 
may have a minimal effect on the total costs of care 
once treatment has been initiated. The problem of 
controlling the costs of ongoing treatment is the sub¬ 
ject of the next section. 


Changing Medical Practice 

Because most medical care purchasing decisions are 
made by physicians and other providers, rather than 
by the patients themselves, savings might be achieved 
if unnecessary services could be eliminated through 
external review of those decisions or through efforts 
to modify the providers’ own decision-making. 

External Utilization Controls—The term “utilization 
controls” embraces a variety of external constraints 
imposed by a payer on the volume or nature of 
services furnished or ordered by providers. 6 These 
include: 

• Pre-admission certification for elective inpatient 
stays; 


5 In 1978, 10 percent of U.S. families accounted for 67 percent of total 
health expenditures. U.S. Congress, Congressional Budget Office, Cata¬ 
strophic Medical Expenses: Patterns in the Non-Elderly, Non-Poor Population 
(Washington, D.C.: Government Printing Office, December 1982), xviii. 

6 These techniques are sometimes referred to by health insurers as “man¬ 
aged care.” Others restrict the term “managed care” to the more aggressive 
interventions in the health care system represented by HMOs or similar enti¬ 
ties. This is the sense in which the term will be used later in this report. 


• Concurrent review, under which patients already 
admitted to the hospital are monitored to ensure 
the appropriateness of their continued stay; 

• Voluntary or mandatory second opinions before 
elective surgery; 

• Case management, under which the payer or the 
payer’s agent attempts to assume control of the 
overall delivery of services to an individual high- 
cost patient; 

• Various approaches for shifting the locus of care 
from high-cost to low-cost settings. These include 
requirements that certain surgical procedures be 
performed on an outpatient basis, or that diag¬ 
nostic tests ordinarily required for inpatients be 
conducted before the patient is admitted to the 
hospital. 

Utilization controls, especially pre-admission certifi¬ 
cation and concurrent review, have become a stand¬ 
ard feature of health insurance plans during the 1980s. 
They are now used in the Medicare program, in 29 
State Medicaid programs (as of 1987), and in 72 per¬ 
cent of employer-sponsored health plans (as of 1988), 
up from 59 percent just a year earlier. 7 Despite the 
rapid adoption of utilization control systems by both 
public and private payers, they have received little 
systematic study, and evidence that they actually 
reduce spending is limited. Pre-admission review has 
the strongest track record; one controlled study found 
that it produced net savings for an average employee 
group of 7.3 percent, with even higher savings for 
groups that had very high utilization before the pro¬ 
grams were initiated. 8 The evidence on some of the 
other approaches is less clear. For example, some 
studies have suggested that voluntary second surgical 
opinion programs may not deter enough unnecessary 
surgery to offset the costs of the second opinions 
themselves; mandatory programs appear to be more 
successful. 9 

There are also concerns that even the most success¬ 
ful utilization control approaches focus only on inpa¬ 
tient care and may merely shift the site in which care 
is delivered without fundamentally changing medical 
practice. 10 If a reduction in inpatient admissions is 


7 Phoebe A. Lindsey, “Medicaid Utilization Control Programs: Results of 
a 1987 Study,” Health Care Financing Review 10 (4) (Summer 1989): 79-92; 
and Jon Gabel, et al., “Employer-Sponsored Health Insurance in America,” 
Health Affairs 8 (2) (Summer 1989): 116—128. 

8 Paul Feldstein, Thomas Wickizer, and John Wheeler, “Private Cost Con¬ 
tainment: The Effects of Utilization Review Programs on Health Care Use 
and Expenditures,” New England Journal of Medicine 318 (20) (May 19, 
1988): 1310-1314. 

9 For a review of the literature, see Danny Ermann, “Hospital Utilization 
Review: Past Experience, Future Directions,” Journal of Health Politics, 
Policy and Law 13 (4) (Winter 1988): 683-704. 

10 For a discussion of this issue, see Institute of Medicine, Controlling Costs 
and Changing Patient Care? The Role of Utilization Management (Washington, 
D.C.: 1989). 


30 




followed by an increase in outpatient services, savings 
may be only temporary; soon costs may begin to rise 
again as rapidly as before. One observer has argued 
that, because technologies that were once available 
only in hospitals are now widely diffused in the com¬ 
munity, the hospital is no longer the appropriate focus 
of cost-containment efforts. At the same time, how¬ 
ever, utilization controls for ambulatory services have 
been slow to develop. In part, this is because most 
ambulatory services have relatively small prices. The 
administrative costs of reviewing each service may 
outweigh any potential savings. 11 Some insurers have 
begun to require prior authorization for the most 
costly outpatient services, such as CAT scans or other 
major diagnostic procedures. Whether such measures 
are actually producing savings is not yet known. 

Utilization controls face another barrier that may be 
even more important than administrative costs: the 
subjective nature of medical practice. Each patient is 
somehow unique, and external reviewers may have 
difficulty overriding the clinical judgments of individ¬ 
ual practitioners in specific cases. This may be espe¬ 
cially true when there is little consensus about the 
most appropriate treatment for a given condition, a 
problem to be discussed in the next section. In any 
event, some observers have contended that a persist¬ 
ent physician who is prepared to appeal a denial of 
authorization will often prevail. (The relative leverage 
of the individual practitioner may have been en¬ 
hanced by recent legal decisions subjecting external 
utilization control agents to malpractice liability for 
denials of necessary care.) In consequence, utilization 
review may function as a delaying tactic rather than 
an absolute control, achieving savings only because 
some physicians will not take the trouble to protest 
the reviewers’ decisions. The result has been termed 
“rationing by inconvenience.’’ 12 Such savings as are 
achieved may diminish over time as physicians 
become more skillful in dealing with the system. 

For this reason, some analysts have suggested that 
savings over a longer term may depend on the extent 
to which providers “sign on” to the concept of elimi¬ 
nating unnecessary services. In this view, real utiliza¬ 
tion control will require voluntary changes in the way 
physicians practice medicine. 

Modifying Practice Styles—Beginning in the 1970s, 
studies by Wennberg and others showed that there 
was substantial geographic variation in the rate of use 
of specific medical or surgical procedures. For exam¬ 
ple, the rate of tonsillectomies in one area of New 

11 Jeff C. Goldsmith, “Competition’s Impact: A Report from the Front,” 
Health Affairs 7 (3) (Summer 1988): 162-173. 

12 Gerald W. Grumet, “Health Care Rationing Through Inconvenience: 
The Third Party’s Secret Weapon,” New England Journal of Medicine 321 (9) 
(August 31, 1989): 607-611. 


England was six times higher than the lowest rate in 
the region. 13 While some of the variations uncovered 
in “small area analysis” might be attributable to differ¬ 
ences in the incidence of illness in different popula¬ 
tions, this explanation appeared to be insufficient to 
account for all the variation; some other factors had 
to be at work. One hypothesis was that physicians in 
different areas had different “practice styles.” Each 
community had its own medical culture, its own char¬ 
acteristic way of diagnosing or treating particular dis¬ 
eases or conditions. Physicians adopted the practice 
style of their community in the absence of firm and 
objective information about which treatment ap¬ 
proach was actually superior. 

Other explanations have been offered for small area 
variations in medical practice; these will be discussed 
further below. However, the practice style hypothesis 
has won many supporters and has led to proposals for 
controlling medical care costs by (a) improving 
knowledge of the relative efficacy of different medical 
treatments and (b) disseminating this knowledge to 
practitioners in the expectation that they will modify 
their practice styles accordingly. The Omnibus 
Budget Reconciliation Act of 1989 (P.L. 101-239) es¬ 
tablishes a new program within the Department of 
Health and Human Services for research on the effec¬ 
tiveness of medical treatments and the development of 
practice guidelines. Not all of the proponents of this 
initiative view it as a cost-containment measure. Some 
view it chiefly as a possible way of improving quality 
of care, and therefore worth pursuing whether or not 
any cost savings result. The following discussion, 
however, considers only the potential of medical 
practice research to reduce costs. 

To have a significant impact, guidelines will need 
to address areas of practice on which there is real dis¬ 
agreement among physicians. There have been some 
efforts in the past to codify elements of medical prac¬ 
tice on which there already existed a consensus. How¬ 
ever, if most physicians already agree on the best 
treatments, promulgating that agreement in the form 
of guidelines may not have a measurable impact on 
medical practice. (This appears to have been the case, 
for example, with a 1984 consensus report on the 
treatment of high blood pressure. 14 ) For this reason, 
the treatment research initiative will focus on condi¬ 
tions for which there is found to be a wide variation 
in current practice. Because the Nation is just begin¬ 
ning to devote significant resources to research on the 
outcomes of alternative medical treatments, it may 


13 John Wennberg and Alan Gittelsohn, “Variations in Medical Care 
Among Small Areas,” Scientific American 246 (April 1982): 120-134. 

14 Martha N. Hill, David M. Levine, and Paul K. Whelton, “Awareness, 
Use, and Impact of the 1984 Joint National Committee Consensus Report on 
High Blood Pressure,” American Journal of Public Health 78 (9) (September 
1988): 1190-1194. 


31 




take time for researchers to reach agreement in cases 
where practice variation is the result of real scientific 
uncertainty. The full potential savings from this strat¬ 
egy might therefore be realized only over the long 
term. 

Assuming that future research can resolve disagree¬ 
ments over appropriate treatments, there would 
remain the task of inducing physicians to modify their 
practices voluntarily on the basis of the new findings. 
Some success in changing practices has been reported 
when physicians have been introduced to guidelines 
through structured face-to-face educational programs 
conducted by respected peers. 15 Some other efforts 
that relied only on printed materials to communicate 
practice recommendations have had disappointing re¬ 
sults. Providers could be aware of and even approve 
the recommendations without making significant 
changes in practice. It is possible that some physicians 
may encounter barriers in implementing even guide¬ 
lines with which they nominally agree. These may in¬ 
clude concerns about malpractice liability, lack of the 
substitute skills or the special equipment needed to 
follow the guidelines, economic incentives, or pres¬ 
sure from patients. 16 These barriers might be over¬ 
come with more vigorous educational efforts. Still, 
countervailing economic and professional pressures 
may limit the willingness or ability of physicians to 
comply voluntarily with treatment guidelines. 

One alternative is to use the results of outcomes re¬ 
search as the basis for mandatory, rather than volun¬ 
tary, guidelines—that is, as a way of strengthening or 
broadening current utilization control programs. Pro¬ 
posals to do so have met strong opposition from the 
medical community, on the grounds that medicine 
cannot be reduced to a “cookbook” and that to 
compel physicians to comply with fixed practice rules 
would stifle innovation. In addition, there would 
remain the problem of achieving sufficient savings to 
offset the administrative costs of review systems. 

Another option is to replace service-by-service utili¬ 
zation review with general comparisons of each phy¬ 
sician’s practice patterns to those of his or her peers. 
Physicians who, over time, consistently furnished or 
ordered more of certain services than others in the 
peer group would be targeted for closer scrutiny, to 
determine whether patterns of inappropriate utiliza¬ 
tion existed. Physicians found to be outliers might be 
the focus of special educational efforts in the hopes of 


15 See Mark R. Chassin, “Standards of Care in Medicine,” Inquiry 25 (4) 
(Winter 1988): 437-453. 

16 Jonathan Lomas, et al., “Do Practice Guidelines Guide Practice? The 
Effect of a Consensus Statement on the Practice of Physicians,” New England 
Journal of Medicine 321 (19) (November 9, 1989): 1306-1311; and Jacqueline 
Kosecoff, et al., “Effects of the National Institutes of Health Consensus De¬ 
velopment Program on Physician Practice,” Journal of the American Medical 
Association 258 (19) (November 20, 1987): 2708-2713. 


inducing voluntary change. Continued noncompliance 
might trigger requirements that individual services re¬ 
ceive prior authorization or could even lead to ex¬ 
clusion from participation in a given public or private 
insurance program. 

How much could be saved if all inappropriate serv¬ 
ices were eliminated? Some studies have found very 
high rates of unnecessary care. For example, Chassin 
et al., in a thirteen-site study, found that 17 percent of 
all coronary angiographies were unnecessary; for 
other procedures, the rate of inappropriate use was as 
high as 32 percent. They also found, however, that 
the unnecessary care explained only a small fraction 
of variations in utilization across geographic areas. If 
none of the inappropriate angiographies had been per¬ 
formed, the area with the highest use of this proce¬ 
dure would still have had more than twice the 
number of angiographies as the lowest-use area. The 
authors suggest that other factors must play a part in 
this difference: disease incidence, differences in the 
point at which primary care physicians decide to refer 
patients to specialists, or cultural or social differences 
in the stage at which patients sought care. 17 Another 
multi-site study has found that, while practice style 
may explain differences in utilization of certain spe¬ 
cific procedures, it does not explain overall differ¬ 
ences in per capita use of medical care in different 
areas. At the aggregate level, standard socioeconomic 
factors could explain much of the difference in use 
and intensity of services. 18 

These preliminary studies suggest that there could 
be underutilization of services in some areas, while 
there is overutilization of the same services in other 
areas. Treatment research could pinpoint, not only 
cases in which unnecessary services could be elimi¬ 
nated, but also cases in which patients have had 
insufficient access (whether physical or financial) to 
necessary care. It is for this reason that some propo¬ 
nents of outcomes research have emphasized its po¬ 
tential impact on quality, rather than its potential for 
cost savings. Precisely because there is uncertainty 
about the relative efficacy of many treatments, it 
may be too early to say whether optimal medical 
treatment would involve more or fewer services than 
are currently furnished. 


17 Mark R. Chassin, et al., “Does Inappropriate Use Explain Geographic 
Variations in the Use of Health Care Services?” Journal of the American Med¬ 
ical Association 258 (18) (November 13, 1987): 2533-2537. 

18 Sherman Folland and Milan Stano, “Sources of Small Area Variations 
in the Use of Medical Care,” Journal of Health Economics 8 (1) (March 1989): 
85-107. 


32 




Supply Controls 

If utilization controls or practice guidelines succeed 
in limiting unnecessary care, the full potential savings 
from any reduction in the number of services deliv¬ 
ered may be realized only if there is a proportionate 
reduction in the resources used to provide those serv¬ 
ices. For example, changes in medical practice in the 
late 1970s and early 1980s led to a decline in inpatient 
hospital admissions without a corresponding reduction 
in hospital capacity. The result in many areas has 
been underutilized facilities spreading their fixed costs 
across a declining number of patients; while there are 
fewer patients, the cost for each patient rises because 
the unused capacity must still be paid for. 

In addition, the existence of excess capacity may 
generate continuing pressures to fmd some new way 
of using that capacity and restoring utilization to its 
previous levels. 19 The view that the use of medical 
services could rise to fill any underused resources led 
to what was perhaps the dominant approach to cost 
containment in the 1970s: health planning, the regu¬ 
lation of facility construction and other capital 
expenditures. 

In 1964, New York became the first State to estab¬ 
lish a certificate-of-need (CON) program, under 
which proposals to build a new facility or expand an 
existing one had to be approved by a government 
agency. Other States followed, and a 1972 amendment 
to the Social Security Act provided that facilities in 
those States proceeding with construction without 
obtaining a CON could be denied Medicare and Med¬ 
icaid reimbursement for their capital expenditures. 
Finally, the Health Planning and Resources Develop¬ 
ment Act in 1974 required all States to establish simi¬ 
lar programs. This requirement was repealed in 1986, 
along with all Federal support for State health plan¬ 
ning programs. States may continue to operate pro¬ 
grams on their own; 39 States and the District of 
Columbia still do so. However, Medicare reim¬ 
bursement is no longer contingent on State approval 
of capital expenditures, and a number of States 
have now limited their reviews to nursing home 
construction. 20 

Several factors contributed to the reversal of policy 
on health planning. In part, it fell victim to the gen¬ 


19 The view that hospital admissions rise in proportion to hospital bed ca¬ 
pacity was originally advanced by Milton Roemer, in “Bed Supply and Hos¬ 
pital Utilization: A Natural Experiment,” Hospitals 35 (21) (November 1, 
1961): 36-42; Some more recent studies have concluded that the relation be¬ 
tween supply and utilization may not be as straightforward as “Roemer’s 
law” would suggest. W. Ross Brewer and Mary Anne Freedman, “Causes 
and Implications of Variation in Hospital Utilization,” Journal of Public 
Health Policy 3 (4) (December 1982): 445-154. 

20 American Hospital Association, State Issues Forum, State Health Plan¬ 
ning Report (Chicago: July 1989). 


eral preference for market as opposed to regulatory 
solutions during the early 1980s. From a Federal 
perspective, the adoption in 1983 of Medicare’s pro¬ 
spective payment system (PPS) for inpatient hospital 
services was expected to offer a different way of lim¬ 
iting health care resources; this approach is discussed 
further in the next section. 21 Underlying this shift, 
however, were claims that health planning had been 
tried and had failed, largely because of conflicting po¬ 
litical pressures. In many areas, the oversupply of fa¬ 
cilities was such that savings would have required, 
not just limits on new construction, but closure or 
consolidation of existing facilities. Few States were 
able to overcome the political resistance to such clo¬ 
sures. Attempts to limit duplication of services or the 
spread of new technologies often faced similar bar¬ 
riers; attempts to plan for the rational distribution of 
resources on a regional basis had to confront 
providers’ fears of losing to competitors and individ¬ 
ual communities’ desires for the most up-to-date 
facilities. 22 

CON programs did have some successes, particu¬ 
larly in constraining the growth in nursing home beds. 
Because State Medicaid programs are the major 
source of payment for nursing home care, States had 
a strong motive to overcome the political barriers to 
supply constraint. In at least some States, the CON 
process was explicitly seen as a Medicaid cost-con¬ 
tainment measure; the determination of the number of 
nursing home beds needed was related to the maxi¬ 
mum number of patients the State was prepared to 
cover. 23 Even in this case, however, any savings 
were achieved by holding growth in bed supply 
below the rate of growth in the aged population. 
States generally did not close down existing capacity. 

Recent concern about the rate of medical care cost 
increases has led to some calls for a revival of health 
planning, and it is conceivable that these concerns 
might eventually be sufficient to overcome the politi¬ 
cal barriers faced by health planners in the past. How¬ 
ever, not all of the problems with health planning are 
political ones. Effective planning may require a fuller 
understanding of the workings of the health care 
system than is currently available. That system is a 
dynamic one, and decisions that seemed sensible in 
the late 1970s have sometimes had unpredictable ef¬ 
fects. For example, most planning programs focused 


21 The inclusion of capital expenditures in PPS payments has been repeat¬ 
edly postponed. Hospitals are instead paid for Medicare capital expenses on a 
reasonable cost basis, subject to a fixed percentage discount (15 percent be¬ 
ginning January 1, 1990). 

22 For an overview of the barriers to health planning, see Lawrence D. 
Brown, “Common Sense Meets Implementation: Certificate-of-Need Regula¬ 
tion in the States,” Journal of Health Politics, Policy and Law 8 (3) (Fall 1983): 
480-494. (Hereafter cited as Common Sense Meets Implementation.) 

23 Judith Feder and William Scanlon, “Regulating the Bed Supply in Nurs¬ 
ing Homes,” Milbank Quarterly 58 (1) (1980): 54-88. 


33 




on institutional services in hospitals and nursing 
homes, because these were the major sources of ex¬ 
penditure, and did little to control the capital expendi¬ 
tures of community-based physicians or clinics. The 
resulting growth in the availability of high-technology 
facilities outside hospitals is one of the reasons that 
recent reductions in inpatient utilization have been 
offset by increased outpatient costs. (Some States are 
now applying uniform rules across settings.) 

Moreover, a community’s needs may change unpre- 
dictably. New York was more successful than most 
States in controlling inpatient bed supply; it was one 
of the few States in which hospital closures occurred 
on a planned basis. While the number of community 
hospital beds nationally dropped 1.1 percent between 
1977 and 1987, the number in New York dropped 9.9 
percent. 24 New demands on these facilities in the 
1980s, such as the appearance of AIDS (acquired 
immune deficiency syndrome) and the rise in drug-re¬ 
lated problems, have led to serious overcrowding in 
some New York hospitals. The reported crisis in New 
York illustrates one of the potential constraints on the 
planning process. On the one hand, it may be neces¬ 
sary to maintain enough excess capacity to meet un¬ 
foreseen needs or random fluctuations in demand. On 
the other hand, this excess capacity is costly to main¬ 
tain and may itself generate demand. If the supply of 
a given kind of service is sufficient that no one ever 
has to stand in line for it, then the savings from health 
planning may be limited. 

The fullest potential savings from health planning 
would require a more controversial step: limiting the 
supply of health resources to the point at which pa¬ 
tients may have to wait for some period to obtain 
needed but non-emergency services. The result is 
“queueing,” the delays in surgery or high-cost diag¬ 
nostic procedures that are alleged to occur to some 
extent in Canada and to a greater extent in the United 
Kingdom. The degree to which queueing actually 
occurs in either country’s health system has often 
been debated by those who favor or oppose adoption 
of a similar system here. Some people say that essen¬ 
tial care may be unavailable, while others argue that 
resource limits merely oblige providers to set prior¬ 
ities and avoid unnecessary services. 

Whatever the extent to which resources have been 
limited elsewhere, rationing of supply in the United 
States might raise concerns that are not as significant 
in countries where the entire population participates 
in a single insurance program. In those countries, 
everyone is in the same queue, and one’s place in line 
is chiefly determined by the urgency or duration of 


24 American Hospital Association, Hospital Statistics, 1978 and 1988 
editions. 


one’s need. (There are exceptions: one can step out of 
line in the United Kingdom by finding a private pro¬ 
vider, and there are anecdotal accounts that some Ca¬ 
nadians with sufficient resources may seek care in the 
United States.) When queueing has occurred in the 
United States, however, places in line may have been 
determined by financial resources. 

The facilities in New York reporting the greatest 
overcrowding have been those serving the poor and 
the uninsured. Similar effects may have resulted from 
health planning’s major success, the control of nursing 
home bed supply. Because Medicaid payment is gen¬ 
erally less than that available from private patients, 
nursing homes in areas with limited bed supply and 
high occupancy rates have an incentive to accept a 
private-pay patient when a vacancy occurs, while 
Medicaid beneficiaries may be unable to find a place. 
In 28 States, Medicaid administrators report that 
beneficiaries awaiting hospital discharge had difficulty 
finding a nursing home bed. 25 While supply con¬ 
straints are not the only factors limiting access to care 
for low-income Americans, they may exacerbate exist¬ 
ing problems. The acceptability of health planning as 
a cost control strategy may, then, depend in part on 
the extent to which supply limitations are accompa¬ 
nied by efforts to make distribution of limited re¬ 
sources more equitable. 

One other issue should be raised in the context of a 
discussion of health resources: the debate over the 
possible oversupply of physicians and the potential 
consequences of physician supply on health care 
costs. In 1980, the Graduate Medical Education Na¬ 
tional Advisory Committee (GMENAC) reported 
that the United States would have a surplus of 
150,000 physicians by the year 2000. 2 6 The extent of 
the potential surplus has since been the subject of con¬ 
tinuing debate. There are questions about the extent 
to which technology and the aging of the population 
could increase demand, or the adoption of utilization 
controls or managed care could decrease it. The 
number of medical school admissions could decline, 
or physicians might spend more of their time on 
administrative activities and less on patient care. 27 


25 For a fuller discussion of this problem, see U.S. Library of Congress, 
Congressional Research Service, Medicaid Source Booh Background Data and 
Analysis. Report prepared for the House Committee on Energy and Com¬ 
merce (Committee print 100-AA) (Washington, D.C.: November 1988), 467- 
483. (Hereafter cited as Congressional Research Service, Medicaid Source 
Book.) 

26 Graduate Medical Education National Advisory Committee, Report to 
the Secretary, U.S. Department of Health and Human Services (Washington, 
D.C.: 1980). 

27 For contrasting views on these issues, see William B. Schwartz, Frank 
A. Sloan, and Daniel N. Mendelson, “Why There Will Be Little or No Phy¬ 
sician Surplus between Now and the Year 2000,” New England Journal of 
Medicine 318 (14) (April 7, 1988): 892-897; Ernest P. Schloss, “Beyond 
GMENAC—Another Physician Shortage from 2010 to 2030?” New England 
Journal of Medicine 318 (14) (April 7, 1988): 920-922. 


34 




Even less clear than the extent of the future surplus 
is its possible effect on medical costs. Observations 
that per capita use of physician services increases in 
geographic areas with a high ratio of physicians to 
population have led to the hypothesis of “physician- 
induced demand.” Just as excess hospital bed capacity 
may generate more hospital stays, this theory holds 
that a surplus of physicians all attempting to maintain 
their incomes would lead—in the absence of any con¬ 
trols—to excess delivery of services. Repeated efforts 
to demonstrate this have been inconclusive. 28 It is not 
clear that physicians actually modify their medical 
practice in order to maintain a “target income.” Still, 
if the projected surplus does in fact appear, there 
might be greater pressures on physicians to increase 
the number of services they furnish to each patient. 
Some people believe that it may eventually be neces¬ 
sary to consider reducing the supply of physicians (or 
curtailing their working hours). 

This has actually been attempted in one Canadian 
province, British Columbia. A physician who wants 
to participate in the health program that covers all 
citizens of the province must have a billing account, 
and since 1985 the number of accounts has been lim¬ 
ited (limits vary by specialty and geographic area). A 
physician who fails to obtain a billing number cannot 
earn a living as a physician. Critics of the system con¬ 
tend, however, that British Columbia is merely ex¬ 
porting its physician surplus to other provinces or to 
the United States. 29 Given the political problems 
health planners in the United States have experienced 
in trying to close hospitals, it seems unlikely that Brit¬ 
ish Columbia’s efforts could be reproduced here, with 
government regulators telling new medical school 
graduates to find some other profession. However, 
there are proposals to achieve the same goal through 
private means. Some of the more ambitious “managed 
care” agendas discussed in the final section of this 
report contemplate enrollment of the entire popula¬ 
tion in health maintenance organizations (HMOs) or 
other structured delivery systems that would match 
their resources to the needs of the enrolled popula¬ 
tion; this approach would potentially reduce employ¬ 
ment opportunities for physicians. 30 


28 See Louis F. Rossiter and Gail R. Wilensky, "A Reexamination of the 
Use of Physician Services: The Role of Physician-Initiated Demand,” Inquiry 
20 (2) (Summer 1983): 162-172; Kathryn M. Langwell and Lyle M. Nelson, 
“Physician Payment Systems: A Review of History, Alternatives and Evi¬ 
dence," Medical Care Review 43 (1) (Spring 1986): 5-58. 

29 Morris L. Barer, "Regulating Physician Supply: The Evolution of Brit¬ 
ish Columbia's Bill 41,” Journal of Health Politics, Policy, and Law 13 (1) 
(Spring 1988): 1-25. 

30 For example, Alain Enthoven has characterized the “buy right” scheme 
advanced by Walter McClure as requiring that “good-quality, efficient doc¬ 
tors prosper while others are induced to retire. Alain C. Enthoven, Man¬ 
aged Competition in Health Care and the Unfinished Agenda," Health Care 
Financing Review, 1986 Annual Supplement, 105-119. 


Reimbursement Reform 

Proposals for reimbursement reform begin with the 
premise that traditional payment systems, under 
which providers receive their full costs or charges for 
whatever services they choose to furnish, encourage 
inefficiency and the delivery of unnecessary care. 

The simplest type of reform is for payers to set 
fixed prices for defined units of service, such as a day 
of inpatient care or a physician office visit. However, 
this approach may not reduce costs if providers are 
able to modify the volume or nature of the services 
they provide to make up for the lost revenue on indi¬ 
vidual services. For this reason, the focus of reim¬ 
bursement reform proposals is on developing pricing 
mechanisms that give providers incentives to control 
both volume and unit cost. 

This is generally accomplished by redefining the 
commodity the insurer is purchasing. Instead of 
paying for individual units of service, the insurer 
makes one payment for an episode of care (as in 
Medicare’s prospective payment system, PPS), for 
overall treatment of a patient during a given time 
period (capitation), or for treatment of an entire popu¬ 
lation (as in Canada’s global budgeting system for 
hospitals). These approaches may be seen as aligned 
on an ascending scale depending on the degree of 
aggregation of the unit being purchased, with per-case 
payment at the low end and payment for an entire pa¬ 
tient population at the other. In all cases, however, 
the aim is to define in advance the total amount of re¬ 
sources the provider may consume in furnishing treat¬ 
ment to a patient or group of patients. 

Per-case payment and capitation give the provider 
an incentive to perform more efficiently in treating in¬ 
dividual patients, either reducing the cost of produc¬ 
ing each unit of service or reducing the number of 
units furnished to each patient. These approaches may 
therefore be seen as alternatives to external utilization 
controls. Global budgeting defines the total resources 
available for treating all patients, and may be seen as 
an alternative to health planning. 31 Reimbursement 
controls have the same goals as direct regulation of 
medical practice and supply, but shift the responsibil¬ 
ity for decision-making from the third-party payer or 
the government to the actual providers of care. In 
order to live within the established rates or budgets, 
the providers must be self-regulating; they must make 


31 In practice, the Canadian system uses both global budgeting and health 
planning. However, some of the rate regulation systems in the United States 
have explicitly superseded the health planning system. A facility that has ob¬ 
tained a certificate of need for expansion may proceed only if the rate com¬ 
mission approves the necessary increase in capital costs. For a discussion of 
the interplay of planning and rate regulation, see Brown, Common Sense 
Meets Implementation. 


35 




the same sorts of treatment and resource allocation 
decisions that would otherwise have been imposed 
externally. 

As the Medicare program has demonstrated, it is 
possible for a single payer with sufficient market 
power to adopt such reimbursement changes on its 
own. 32 The effects of this unilateral approach in a 
pluralistic system are uncertain. While some providers 
may be driven to improve their efficiency, others may 
instead respond to shortfalls in reimbursement from 
one payer by raising charges to other groups, those 
without the market power to dictate prices. The pos¬ 
sibility of “cost-shifting” may mean that savings for 
one purchaser are not translated into real reductions 
in total system expenditures. 

In a sufficiently competitive market, the providers’ 
ability to engage in this “cost-shifting” may be lim¬ 
ited. A hospital may face, not only payment limits 
under Medicare and Medicaid, but pressure from pri¬ 
vate insurers or employer groups to grant price dis¬ 
counts in order to be assured of an adequate market 
share. Characteristics other than efficiency may deter¬ 
mine a provider’s success in the face of these compet¬ 
ing demands. For example, a suburban non-teaching 
hospital with few uninsured patients may be at a rela¬ 
tive advantage as compared to a center city teaching 
facility with a heavy uncompensated care load. Indi¬ 
vidual purchasers who reduce their costs by favoring 
the suburban hospital may leave the society to find 
some other means of subsidizing essential facilities 
that are handicapped in price competition. 

A system in which multiple payers negotiate indi¬ 
vidually with providers may, then, lead either to cost- 
shifting or to a situation in which price concerns 
override other societal goals, such as medical educa¬ 
tion and charity care. For this reason, some people 
argue that real efficiency can be achieved only if all 
payers are paying under the same rules. 

Uniform ratesetting is common in other industrial¬ 
ized nations, both those with single-payer health in¬ 
surance systems (as in Canada) and those where many 
different entities provide insurance (as in West Ger¬ 
many). The experience in the United States is limited 
to experiments in a few States beginning in the 1970s. 
Federal waivers of Medicare and Medicaid rules 
made it possible for those two payers to participate in 
the programs on a demonstration basis, while State 
laws compelled participation by private insurers and 
individual payers, resulting in an “all-payer” system. 


32 As the Medicaid experience has shown, adoption of payment restraints 
by a payer with too small a market share may reduce access for the payer’s 
enrollees. For example, low reimbursement rates are the major reason physi¬ 
cians decline to participate in the Medicaid program. See Congressional Re¬ 
search Service, Medicaid Source Book, 448-454. 


Medicaid law now permits any State to include Med¬ 
icaid in such a system, and Medicare may be included 
if the State can show that its system controls costs as 
effectively as PPS. However, full “all-payer” systems 
continue only in Maryland and in part of New York 
State. Several other States operate “partial-payer” 
systems that include all payers except Medicare. 33 
These systems have generally used the price aggrega¬ 
tion approaches described above. That is, they either 
establish a rate for total treatment of a case (as under 
PPS) or they establish a total budget for a hospital 
during a year, setting prices for the hospital in such a 
way as to achieve a target revenue amount. 

It has been shown that, in 6 States with ratesetting 
systems, annual increases in cost per admission were 
consistently 3 to 4 percentage points below the na¬ 
tional average from 1976 to 1984. During the same 
period, however, other States saw a drop in admis¬ 
sions per capita, while admissions in the ratesetting 
States were stable. As a result, the difference in 
growth in per capita rates of spending was not so 
striking: per capita costs rose at an annual rate of 11.5 
percent a year in the ratesetting States and 13 percent 
a year in other States. 34 In addition, the ratesetting 
States had much higher costs at the outset than most 
other States. Some observers have questioned 
whether ratesetting could have achieved comparable 
savings in areas where costs were lower to begin 
with. 35 

Evidence from other countries with universal rate¬ 
setting systems suggests that greater savings may be 
possible. In Canada, where the provinces establish 
global budgets for each hospital, hospital expenditures 
per capita were one-third lower than in the United 
States in 1985. (Similar systems in other industrial na¬ 
tions have been less successful.) 36 As admission rates 
are not markedly lower, there is considerable uncer¬ 
tainty about the sources of the difference. Some of the 
saving may be in administrative costs, simply because 
the hospitals do not need to meet the paperwork re¬ 
quirements of multiple payers. The rest of the differ¬ 
ence is often attributed to differences in the intensity 
of the services furnished to each patient. Whether 
these differences reflect “underservice” in Canada or 


33 Maine’s system takes hospitals’ Medicare revenues into account when 
determining what the hospitals may charge other payers, thus achieving 
overall budgetary control without direct Medicare participation. This ap¬ 
proach has recently survived a legal challenge by hospitals. 

34 Carl J. Schramm, Steven C. Renn, and Brian Biles, “New Perspectives 
on State Rate-Setting,” Health Affairs 5 (3) (Fall 1986): 22-33. 

35 Charles L. Eby and Donald R. Cohodes, “What Do We Know About 
Rate-Setting?” Journal of Health Politics, Policy, and Law 10 (2) (Summer 
1985): 299-327. 

36 Organisation for Economic Co-Operation and Development, Financing 
and Delivering Health Care: A Comparative Analysis of OECD Countries 
(OECD Social Policy Studies No. 4.) (Paris: 1987), 63. 


36 




“overservice” in the United States is the subject of 
continuing debate. 37 

In a sense, the statistical evidence may be beside the 
point. An all-payer system could in theory fix its 
prices at any level, with the potential consequence of 
reduced access or quality if the prices are set too low. 
The available data may thus be taken as indicating, 
not the savings that could hypothetically be achieved, 
but the savings that were politically feasible in spe¬ 
cific States during a specific period. Continuing pres¬ 
sure by consumers and providers for the adoption of 
new medical technologies may limit the ability of 
ratesetting systems to restrain expenditure growth 
over the long term. Even in Canada, overall medical 
expenditures outpaced inflation by 2.9 percent a year 
in the period 1980-87, almost the same as the 3.0 per¬ 
cent annual rate observed in the United States in the 
same years. 38 The ultimate efficacy of reimbursement 
controls may depend, in the same way that the suc¬ 
cess of health planning depends, on the political will 
to constrain health care consumption. 

That political will might in turn depend on percep¬ 
tions of the impact of reimbursement controls on the 
quality of care. The effect of Medicare’s prospective 
payment system, for example, has been argued con¬ 
tinuously since its implementation in 1983. One of the 
immediate responses of hospitals to the incentives of 
the new system was to shorten the average length of 
stay in the hospital for each Medicare patient (al¬ 
though average length of stay had already been drop¬ 
ping for several years). Opponents of the new system 
have contended that patients were being discharged 
“quicker and sicker,” transferred to their own homes 
or to nursing homes at a stage in their recovery when 
they still required hospital-level care. Because of a 
lack of satisfactory measures of medical care out¬ 
comes for large populations, evidence on this issue re¬ 
mains largely anecdotal. Still, the possibility that there 
has been a deterioration in quality of care for at least 
some Medicare patients since the implementation of 
PPS cannot be ruled out. The hospitals themselves 
argue that current payment levels are insufficient to 
maintain adequate quality. At the same time, the 
Administration and the Prospective Payment Assess¬ 
ment Commission (the independent commission that 
reviews PPS) have argued that hospitals are still not 
operating at peak efficiency and that further payment 
restraint is needed to provide continued incentives for 
cost reduction. 39 


37 For a variety of views on this subject, see the series of articles on Can¬ 
ada’s hospital system in Health Affairs 7 (5) (Winter 1988). 

38 Schieber and Poullier, International Health Care Expenditure Trends: 

1987. 

39 U.S. Prospective Payment Assessment Commission, Report and Recom¬ 
mendations to the Secretary, U.S. Department of Health and Human Services 
(Washington, D.C.: Government Printing Office, March 1989); For a recent 
review of hospital cost responses to PPS, see Steven H. Sheingold, "The 


This debate illustrates one potential dilemma in the 
strategy of achieving savings by relying on the politi¬ 
cal process to limit the financial resources available to 
providers. On the one hand, legislators driven by 
budgetary concerns may continue to ratchet down 
spending limits until they have clear evidence that 
quality has been seriously affected. On the other 
hand, provider or constituent pressure may lead them 
to relax those limits before the providers have done 
everything possible to improve their efficiency. Be¬ 
cause no one knows the ideal amount to spend on 
medical care, some people say that this process can 
never achieve equilibrium and that cost control efforts 
should instead depend on the process through which 
other sectors of the economy achieve “correct” 
spending levels: the free market. Proposals for 
encouraging competition in health care represent the 
last of the strategies to be reviewed in this report. 


Competition 

The idea of reducing health care costs by promot¬ 
ing competition in the health care marketplace was 
first advanced in the 1970s. Some analysts, arguing 
that such initiatives as rate regulation, health plan¬ 
ning, and utilization review had been compromised by 
political interference, contended that the free market 
was better equipped to control costs than Govern¬ 
ment was. By the early 1980s, this view had wide cur¬ 
rency and had become the official policy of the 
Reagan Administration. Since then, there has been a 
continuing debate between advocates of competition 
and those who favored further regulatory inter¬ 
ventions by Government. The debate has been 
complicated by a lack of agreement over what “com¬ 
petition” consists of. What is the health care market? 
Who are the purchasers, and what are they buying? 

In a simple market, hospitals and physicians would 
compete directly for the individual consumer’s dollar. 
The consumer would pick the best values just as he 
or she does when buying any other commodity. As 
was suggested in the discussion of cost-sharing, it is 
not clear that consumers are capable of making such 
evaluations; moreover, many purchasing decisions are 
made by physicians on their patients’ behalf, rather 
than directly by consumers. Finally, because few 
people can afford the costs of care for a major illness, 
most of the consumer’s dollar is spent on health insur¬ 
ance, not on medical care itself. As was suggested 
earlier, this is true even when the insurance plan im¬ 
poses cost-sharing requirements on enrollees, because 
most health care costs are incurred by a relatively 


First Three Years of PPS: Impact on Medicare Costs,” Health Affairs 8 (3) 
(Fall 1989): 191-204. 


37 




small number of high-cost cases. For this reason, most 
proponents of competition are really talking about 
price competition among insurers, and only indirectly 
among providers. 

If the insurer is—as traditional health insurance 
plans were—a passive payer for services obtained by 
policyholders, there is little room for serious price 
competition. The only element of cost that the insurer 
can control is its own administrative cost. Competi¬ 
tion, if any, may turn on such non-price factors as 
reputation or the insurer’s ability to screen out high- 
risk applicants. 40 

Competition among insurers can result in real cost 
savings only if the insurers have some influence on 
the costs of health care itself. In this model, insurers 
compete to offer lower prices by acting as prudent 
purchasers, proxies for the rational consumer. The in¬ 
surers are selling a new product, no longer simply in¬ 
surance, but “insured health care.’’ To some extent, 
this new insurance market has already arrived. As 
was suggested earlier, most insurance plans, both 
public and private, have adopted some utilization 
control measures. Very few insurers are still passive 
bill-payers. 

Once all insurers have adopted these basic cost con¬ 
trol measures, further competition would presumably 
require more aggressive interventions by insurers in 
the health care system. Proponents of competition 
contemplate a marketplace in which insurers develop 
structured delivery systems, with the highest profits 
going to those whose networks are most efficient. 
The prototype for these systems is the HMO. More 
recently, some insurers have been experimenting with 
hybrid programs, such as “point-of-service plans,” 
that are less structured and provide somewhat greater 
flexibility to enrollees. 

Health Maintenance Organizations—A health main¬ 
tenance organization (HMO) is a form of health 
insurer; like any other insurer, it accepts financial re¬ 
sponsibility for a defined set of health care benefits in 
return for a fixed monthly per capita premium. Unlike 
other insurers, HMOs directly provide or arrange for 
health care services, through affiliated physicians, 
hospitals, and other providers. The enrollees covered 
by the HMO agree to obtain all services, except emer¬ 
gency and out-of-area care, from or with the authori¬ 
zation of the HMO or its affiliated providers. The 


40 Alain Enthoven has summarized the alternatives to price competition: 
“[Selection of preferred risks, market segmentation, product differentiation 
that raises the costs of comparing products, discontinuity in coverage, refusal 
to insure certain individuals or exclusion of coverage for treatment of pre¬ 
existing medical conditions, biased information regarding coverage and qual¬ 
ity, and erection of entry barriers [that is, to new competitors].” Alain C. 
Enthoven, “Managed Competition of Alternative Delivery Systems,” Journal 
of Health Politics, Policy and Law 13 (2) (Summer 1988): 305-321. 


HMO has no liability to pay for unauthorized non¬ 
urgent care obtained outside the organization. Ordi¬ 
narily, the enrollee’s point of entry into the system is 
through a single primary care provider, who func¬ 
tions as a “gatekeeper,” determining when a patient 
may see a specialist or be admitted to the hospital. 
The HMO exerts further administrative controls on 
use of services through authorization mechanisms 
and/or treatment protocols. HMOs also use a variety 
of other cost-saving techniques, such as negotiated 
discounts with providers and payment mechanisms 
that place individual providers at risk for the costs of 
the services they furnish or order. 

The particular cost-saving techniques adopted by 
HMOs and other “managed care” plans are not funda¬ 
mentally different from the regulatory approaches de¬ 
scribed in the preceding sections. An HMO imposes 
external utilization review on its participating pro¬ 
viders and may develop practice guidelines or proto¬ 
cols. Staff or group practice model HMOs (those that 
employ physicians on a full-time basis) impose supply 
constraints, limiting available resources to those 
needed by their membership. Individual practice asso¬ 
ciations (IPAs, whose physicians practice in their own 
offices and see a mix of HMO and non-HMO patients) 
use payment methods that create financial incentives 
to control utilization, such as capitation or expendi¬ 
ture targets. 

One additional cost-saving approach that was once 
unique to HMOs is “gatekeeping.” Under a gate- 
keeping approach, a patient receives all non-emer¬ 
gency care from, or with the authorization of, a single 
primary care provider. The provider thus functions as 
a “gatekeeper,” preventing the enrollee from inde¬ 
pendently accessing specialists or other services and 
presumably managing the overall care of the patient. 
The extent to which gatekeeping produces savings 
over and above those provided by the other cost¬ 
saving techniques adopted by HMOs is uncertain. The 
results of one experiment, the SAFECO health plan 
operated by United Healthcare in the early 1980s, 
suggest that gatekeeping alone has little effect on 
overall cost. While primary care providers reduced 
the number of referrals to specialists, they were 
unable to control the behavior of the specialists once 
a referral had occurred. There was no meaningful re¬ 
duction in hospital admissions, 70 percent of which 
were controlled by the specialists. 41 Greater success 


41 Stephen Moore, Diane Martin, and William Richardson, “Does the Pri¬ 
mary-Care Gatekeeper Control the Costs of Health Care? Lessons from the 
SAFECO Experience,” New England Journal of Medicine 309 (22) (Decem¬ 
ber 1, 1983): 1400-1404; For the extent to which specialty referrals may de¬ 
termine overall costs, see John K. Glenn, Frank H. Lawler, and Mark S. 
Hoerl, “Physician Referrals in a Competitive Environment: An Estimate of 
the Economic Impact of a Referral,” Journal of the American Medical Associa¬ 
tion 258 (14) (October 9, 1987): 1920-1923. 


38 




has been reported by some State Medicaid programs, 
which have established “primary care case manage¬ 
ment” programs for segments of their covered popu¬ 
lations. Gatekeeping reduced such inappropriate 
behaviors as the use of emergency rooms for primary 
care. However, the utilization patterns addressed by 
these programs may be characteristic of Medicaid 
beneficiaries in the inner city and not of other groups; 
it is not clear that equivalent savings could be 
achieved with a general population. There is some 
evidence that most patients’ care is already “man¬ 
aged” by their primary care physicians, at least to the 
extent that it is managed under formal gatekeeping 
arrangements. 42 

Aside from the uncertain effects of gatekeeping, 
managed care depends on the same kinds of interven¬ 
tions in medical care practice, supply, and financing 
that might otherwise be attempted on a regulatory 
basis. The difference is that, instead of relying on the 
political process to make decisions about the alloca¬ 
tion of health care resources, managed care privatizes 
these decisions. The choice among alternative cost 
control methods—and the stringency with which 
these methods will be applied—will be made by the 
free market. The fundamental contention of propo¬ 
nents of the competitive approach is that the market 
can impose discipline on the health care system that 
cannot be imposed through external regulation. 

This contention rests on two key assumptions: first, 
that buyers will, all other things being equal, select 
the most cost-effective plan; second, that managed 
care offers greater cost-saving potential than the vari¬ 
ous regulatory’ controls described earlier. 

One critical factor has made it difficult to general¬ 
ize about the efficacy of HMOs as a cost-saving ap¬ 
proach: the problem of “biased selection” in systems 
that allow a choice between a conventional health in¬ 
surance plan and an HMO. Numerous studies of such 
“dual choice” employer group plans have shown that 
the members of the group choosing the HMO option 
used fewer health services before their enrollment 
than persons who chose a conventional plan. Similar 
patterns have been observed in Medicare HMO en¬ 
rollment. 43 This does not necessarily mean that HMO 
enrollees were healthier. Studies using self-reported 
condition and similar limi ted measures of health status 
have found no difference between HMO and indem¬ 
nity enrollees. It may be, then, that HMO enrollees 

41 AJ. Dietrich, et aL, “Do Primary Physicians Actually Manage Their 
Patients’ Fee-for-Service Care?” Journal of the American Medical Association 
259 (21) (June 3. 1988): 3145-3149. 

43 For a review of the evidence, see General Accounting Office, Medicare: 
Increase in HMO Reimbursement Would Eliminate Potential Savings Report to 
the Chairman. Subcommittee on Health, House Committee on Ways and 
Means (Washington. D.C.: November 1989). [GAO/HRD-90-38] 


are simply less prone to seek health services, regard¬ 
less of their condition. 44 

In groups that have no HMO option but do offer a 
choice between high- and low-option plans the 
common selection pattern is for the higher users of 
services to choose the more comprehensive plan. 45 In 
most group health programs offering a choice be¬ 
tween HMOs and conventional plans, the HMO op¬ 
tions offer more comprehensive coverage, with less 
enrollee cost-sharing, than even a high-option conven¬ 
tional plan. That higher users of services still prefer 
the conventional plan suggests that non-fmancial as¬ 
pects of HMOs affect the decision, such as limited 
choice of providers, bureaucratic constraints on treat¬ 
ment, or waiting time for non-urgent care. There is 
stronger evidence of biased selection for staff and 
group model HMOs, the most restrictive, than for 
IP As, which are less likely to disrupt enrollees’ tradi¬ 
tional ways of obtaining medical care. 

Possible solutions to the problem of selection bias 
will be discussed further below. One immediate con¬ 
sequence, however, is that the differences between the 
populations in HMOs and conventional plans have 
made it difficult to determine whether HMOs are 
actually more efficient than other insurers. Only one 
major study has corrected adequately for this prob¬ 
lem. In a second component of the RAND Health In¬ 
surance Experiment (HIE) cited earlier, enrollees 
were randomly assigned to the Group Health Cooper¬ 
ative of Puget Sound and an equally comprehensive 
conventional plan; neither plan required cost-sharing. 
This arrangement allowed comparisons of efficiency 
with identical benefits and populations with com¬ 
parable health needs. The results strongly confirmed 
the cost-saving potential of the HMO. The HMO en¬ 
rollees had 40 percent fewer hospital admissions; their 
use of ambulatory services was about the same as that 
of the conventional enrollees. Overall, costs for the 
HMO group were estimated to be 28 percent lower 
than for the control group. 46 There were no per¬ 
ceived effects on quality; measures of health outcomes 
w’ere generally the same for both groups. 47 


44 Fred J. Hellinger. “Selection Bias in Health Maintenance Organizations: 
.Analysis of Recent Evidence,” Health Care Financing Review 9 (2) (Winter 
1987): 55-63. 

45 Robert W. Broyles and Michael D. Rosko, “The Demand for Health 
Insurance and Health Care: A Review of the Empirical Literature,” Medical 
Care Review 45 (2) (Fall 1988): 291-338. 

46 Willard G. Manning, et al., “A Controlled Trial of the Effect of a Pre¬ 
paid Group Practice on Use of Services," Sew England Journal of Medicine 
310 (23) (June 7, 1984): 1505-1510. 

47 John E. Ware Jr., et al., “Comparison of Health Outcomes at a Health 
Maintenance Organisation With Those of Fee-for-Service Care," Lancet 
(May 3. 1986): 1017-1022. One group, low-income HMO enrollees with exist¬ 
ing health problems, had poorer outcomes, possibly because of difficulty 
dealing with the HMO’s internal bureaucracy. 


39 




While the HIE findings are persuasive, two factors 
may limit the general applicability of the results. First, 
the study was conducted in the late 1970s; the com¬ 
parison plan was the passive bill-payer prevalent in 
the insurance industry in that period, with no utiliza¬ 
tion control mechanisms. The more recent adoption 
by conventional plans of some of the cost-control 
measures once associated only with HMOs may mean 
that the difference in efficiency between the two 
types of plan has narrowed. 

Second, the HMO used in the Health Insurance Ex¬ 
periment was a highly structured group-practice plan 
with many years of operating experience. Much of the 
growth in the industry in recent years has involved a 
different type of HMO, the individual practice asso¬ 
ciation (IPA), which contracts with independent phy¬ 
sicians who see a mix of HMO enrollees and other 
kinds of patients. There is evidence that these more 
loosely structured HMOs have not achieved savings 
comparable to those observed in the HIE. 48 Physi¬ 
cians may not modify their styles of practice in treat¬ 
ing HMO enrollees if those enrollees constitute only a 
small share of their practice. In addition, some people 
believe that HMOs cannot impose cost-consciousness 
on practitioners who have not “signed on” to the con¬ 
cept of more efficient and less resource-intensive prac¬ 
tice. Because so little is still known about the relative 
efficacy of different medical practices, external utiliza¬ 
tion controls may not be able to override individual 
physicians’ judgment in many cases. The greater suc¬ 
cess of the “closed panel” plan, whose physicians 
treat HMO enrollees exclusively, has been attributed 
by some observers to the possibility that these plans 
attract physicians who are temperamentally more 
prone to conservative medical practice. 

Because closed panel plans maintain their own med¬ 
ical facilities, they require greater start-up funding 
than IPAs. Federal funds were available to develop 
such plans in the 1970s, but new plans must now rely 
on private investment. Investors have favored IPAs, 
not only because they require less capital, but also be¬ 
cause the wider selection of physicians makes them 
more attractive to consumers. This attraction may, 
however, be purchased at the price of reduced 
efficiency. 

Finally, while some types of HMOs or similar orga¬ 
nizations may be able to reduce costs relative to con¬ 
ventional plans, it is not clear that they have so far 
reduced growth in health care costs. Data from 1961 
through 1981 suggest that HMOs may instead achieve 


48 For the most recent findings, see Alan Hillman, Mark Pauly, and Joseph 
Kerstein, “How Do Financial Incentives Affect Physicians’ Clinical Deci¬ 
sions and the Financial Performance of Health Maintenance Organizations?” 
New England Journal of Medicine 321 (2) (July 13, 1989): 86-92. 


a one-time saving, after which costs rise at the same 
rate as those for other insurance programs. One expla¬ 
nation that has been offered is that providers in 
HMOs are as likely as other providers to use new 
medical technologies. 49 More recent data suggest that 
HMO premium increases have continued to resemble 
those of conventional insurance plans. The average 
HMO premium increase during 1988 was 17.2 per¬ 
cent, very close to the 19 percent increase for all em¬ 
ployer coverage cited at the beginning of this 
report. 50 

That HMO cost increases have paralleled those of 
other insurers does not necessarily mean that HMOs 
have reached the limit of their cost-saving potential. 
Because competition among health insurers was rela¬ 
tively limited until recent years, many HMOs may not 
have faced the market pressures that could induce 
them to achieve greater savings. The next section re¬ 
views proposals to strengthen competition. 

Competition and Consumer Choice—The competi¬ 
tive strategy depends on the willingness of consumers 
to choose the most cost-effective plans. As was sug¬ 
gested earlier, the consumers most likely to incur high 
costs may be least likely to choose the most efficient 
option. The problem of biased selection might persist 
even if conventional insurance plans were to disap¬ 
pear and consumers were able to choose only among 
managed care options. (Some industry analysts believe 
this will occur in the near future, chiefly because em¬ 
ployers will refuse to offer conventional plans.) It is 
possible that the most costly patients, given a choice 
among competing managed care plans, would choose 
the plan that was least restrictive and potentially least 
able to achieve cost savings. The most efficient plans 
might continue to enroll the healthiest patients, for 
whom only limited savings are possible. 

Some people believe that biased selection is largely 
attributable to the fact that consumers are economi¬ 
cally sheltered from the cost of their choice of plan, 
because most of the premium is paid by the employer. 
Various schemes have been advanced to make the 
employee more cost-conscious. For example, the em¬ 
ployer’s contribution might be tied to the cost of the 
least expensive offering, with the employee bearing 
the full cost of the difference between that plan and 
other more expensive options. 


49 Joseph P. Newhouse, et al., “Are Fee-for-Service Costs Increasing 
Faster Than HMO Costs?” Medical Care 23 (8) (August 1985): 960-966. 

50 InterStudy, The Bottom Line: HMO Premiums and Profitability, 1988- 
1989 (Excelsior, Minn.: 1989). Staff and group model HMOs generally had 
lower increases, possibly confirming their greater efficiency. However, these 
HMOs also tend to be older than IPAs; age of the HMO was also a determi¬ 
nant of the rate of increase. 


40 




However, selection bias can occur even when the 
choice of the more expensive plan has real financial 
consequences for the enrollee. Under the Federal Em¬ 
ployees Health Benefits Program (FEHBP), the 
monthly employee share of premium costs in 1990 
ranges from $20.54 in the least expensive high-option 
HMO to $234.07 in the most costly high-option con¬ 
ventional plan, a difference of $213.53 per month. 51 
Under one possible fixed contribution scheme, the 
Federal share of both plans would be set equal to the 
full cost of the HMO ($82.16); the employee share 
would then be zero for the HMO and $265.29 for the 
conventional plan. If some Federal employees or an¬ 
nuitants are already willing to pay 11 times as much 
as others in order to obtain the conventional plan, it is 
not clear that even this change would cause all of 
them to shift to the HMO. For at least some subset of 
enrollees, the preference for unrestricted coverage is 
apparently sufficient to override even strong financial 
incentives. 

One possible solution to the problem of enrollee 
self-selection is to abandon multiple choices and 
oblige all members of a covered group to enter a 
single plan, one selected by the employer or other 
buyer from among competing plans. Assuming that 
employers disregarded their own personal plan prefer¬ 
ences and chose the least costly option, this approach 
would theoretically lead to competition among plans 
on the basis of efficiency. However, both employers 
and HMOs have been hesitant to enter into arrange¬ 
ments under which enrollees are unwillingly locked 
into a highly restrictive plan. For this reason, there 
have evolved arrangements even less restrictive than 
IPAs, known as open-ended or point-of-service plans. 

The predecessor of these plans is the preferred pro¬ 
vider organization (PPO). PPOs negotiate discounted 
rates with certain providers. Enrollees are given a fi¬ 
nancial incentive, in the form of reduced deductible 
or coinsurance requirements, to obtain care from pro¬ 
viders participating in the PPO network. However, 
payment will be made under the plan for services fur¬ 
nished by any provider. PPOs thus differ from 
HMOs, which deny payment altogether for unauthor¬ 
ized non-emergent care provided by providers outside 
the HMO network. While some PPOs have adopted 
managed care techniques, such as the use of gate¬ 
keepers, most of the savings from a PPO are expected 
to result from encouraging enrollees to use the par¬ 
ticipating providers. 

The newer, open-ended plans are hybrids, combin¬ 
ing some features of HMOs and PPOs. Typically, the 


51 The conventional plan is national, while HMOs are offered only in spe¬ 
cific locations. The comparison presented here applies only in one area 
(Tampa, Fla.) and represents the extreme of variation in the FEHBP system. 


plan operates a structured health care system compa¬ 
rable to that of an IPA-model HMO. Enrollees are 
expected to access the system through a primary care 
gatekeeper and obtain services from other network 
providers upon referral by the gatekeeper. Like an 
HMO, the plan also imposes external utilization con¬ 
trols and negotiates price discounts with providers. 
As in a PPO, enrollees are free to use non-network 
providers for covered services, but must pay higher 
cost-sharing amounts if they choose to do so. En¬ 
rollees are also subject to higher cost-sharing if they 
use specialists within the network without the authori¬ 
zation of the gatekeeper. 

Open-ended plans have been adopted by some em¬ 
ployers as the single plan available to their workers, 
replacing systems in which the workers had a choice 
between conventional and HMO options. Their at¬ 
traction has been that they overcome the possible se¬ 
lection bias in dual choice systems by enrolling all 
employees in an HMO-like program. At the same 
time, they can reduce the employee resistance that 
would probably greet a proposal for universal HMO 
enrollment, because they offer employees the safety 
valve of being able to choose non-plan providers. 

Officials of some major insurers that have experi¬ 
mented with open-ended plans in multiple markets 
report that the plans appear to be reducing the rate of 
health care cost increases, relative to the increases for 
their conventional offerings in the same markets. 52 
Because these plans began operations only very re¬ 
cently, the data required for an objective evaluation 
are not yet available. Even PPOs, which have existed 
for a decade, have never been the subject of a con¬ 
trolled study. Some preliminary findings, however, 
suggest that the safety valve that makes PPOs attrac¬ 
tive is potentially a serious weakness, one which may 
carry over to the newer hybrid plans. 

One recent study of a PPO found that enrollees 
used the PPO’s providers for preventive care and 
minor illnesses, but went outside the network about 
half the time for specialty care, major surgery, and 
hospitalization without surgery. 53 One study found a 
similar pattern among PPO enrollees who were actu¬ 
ally employees of one of the providers in the PPO 
network. 54 While these findings are not definitive, 
they suggest a dilemma that may be common to both 
PPOs and the newer types of managed care plans. If 
the price for going out of plan is not punitive, en- 


52 Personal communication with officials of Prudential and CIGNA. 

53 Annemarie Wouters and James Hester, “Patient Choice of Providers in 
a Preferred Provider Organization," Medical Care 26 (3) (March 1988): 240- 
255. The results may not be fully representative, because the PPO studied 
was somewhat skewed towards primary care providers. 

54 Paula Diehr, et al., “Use of a Preferred Provider by Employees of the 
Preferred Provider,” Health Services Research 23 (4) (October 1988): 537-554. 


41 




rollees may obtain much of their care outside the 
network; if the price is set high enough to deter out¬ 
side utilization, the plan may lose its relative 
attractiveness. 

Both solutions to the biased selection problem, 
higher premiums for the non-HMO plan or higher 
cost-sharing for using non-HMO providers, may then 
face the same potential barrier: the highest-risk en- 
rollees, those for whom the greatest potential savings 
presumably exist, may be willing to pay much more 
out-of-pocket to retain free choice of providers and 
avoid bureaucratic restrictions. While the problem 
might be overcome by making the cost of unrestricted 
health care prohibitive, this solution may be fore¬ 
closed by the potential strain on labor relations (or, in 
the case of public programs, political resistance). 

One other solution that has been proposed is to go 
to the roots of consumer resistance to managed care, 
the concern about quality. Some analysts argue that, 
because consumers have little information about the 
relative quality of different medical care providers, 
they must rely on “signals” of quality sent out by var¬ 
ious providers, such as the use of elaborate technol¬ 
ogy or aggressive medical treatment styles. 55 If the 
persons with the highest expectation of requiring 
medical services will accept financial sacrifices to 
avoid managed care programs, this may be because 
they cannot evaluate the care offered by such pro¬ 
grams and wish to remain free to seek out the 
providers who more actively signal quality. This pref¬ 
erence might be overcome if consumers had reliable 
data on the actual quality of the care furnished by dif¬ 
ferent providers or provider systems such as HMOs. 

This view has led to such proposals as the “buy 
right” plan advanced by Walter McClure of the 
Center for Policy Studies in Minnesota. Under this 
plan, a community would collect and make available 
to consumers uniform data on patient outcomes from 


55 For an elaboration of this theory, see James C. Robinson, “Hospital 
Quality Competition and the Economics of Imperfect Information,” Milbank 
Quarterly 66 (3) (1988): 465-481. 


all providers. Consumers would then be in a position 
to determine whether the higher cost providers were 
actually furnishing superior care and could thus make 
rational purchasing decisions. The proposal assumes 
that the community can agree on objective measures 
of quality. Past efforts to develop uniform bases of 
comparison have been controversial. For example, the 
annual release by the Health Care Financing Adminis¬ 
tration of mortality data for Medicare beneficiaries in 
hospitals has been criticized on the grounds that nu¬ 
merous factors other than relative proficiency can 
affect the death rates of hospital patients. Highly spe¬ 
cialized facilities may be treating the most seriously ill 
patients; facilities serving a low-income population 
may find that more of their patients have delayed 
medical treatment beyond the point at which they 
could be helped. Full implementation of the “buy 
right” strategy might have to wait until research can 
provide acceptable standardized outcome measures. 

Assuming that those measures can be developed, 
how would competition then work? Consumers 
would be fully informed about the relative price and 
quality of competing health plans, and would thus be 
equipped to make medical care purchasing decisions 
in the same way that they decide about other pur¬ 
chases. Proponents of competition argue that the 
power of the market would then compel all providers 
to make steady improvements in both quality and effi¬ 
ciency. However, if the health care market could be 
induced to evolve in the same way as other markets, 
it is not necessarily the case that the end product 
would be a single class of providers uniformly striv¬ 
ing to achieve the same goals. The health care market 
could instead be segmented in the way that the mar¬ 
kets for other goods and services are; there might be 
economy and luxury health plans just as there are 
economy and luxury automobiles. Improving the in¬ 
formation available to health care consumers might 
mean only that buyers would be better able to distin¬ 
guish between the two, not that the distinction would 
cease to exist. Whether Americans are prepared to 
accept the same price/quality tradeoffs in buying 
medical care that they do in buying other products is 
an open question. 


42 



MEDICAL MALPRACTICE 


Paul Weiler and Troyen A. Brennan * 


INTRODUCTION 

Medical malpractice is the branch of the law that 
deals with injuries suffered by patients in the course 
of their treatment by doctors or other health care pro¬ 
viders. The legal doctrines in this area remain firmly 
rooted in the traditional tort-fault principle—a doctor 
is liable for a patient’s injuries if and only if these in¬ 
juries were caused by the doctor’s negligence. Law¬ 
yers and judges have long debated the question of 
whether this legal regime secures adequate com¬ 
pensation and corrective justice for already injured 
patients, and safer and better quality care for future 
patients. In the past two decades this debate has 
emerged into the popular and political arena, as doc¬ 
tors and hospitals have confronted steep and sudden 
increases in malpractice litigation and premiums. 

In the last year, the country has emerged from its 
second outburst of malpractice premium increases. In¬ 
surers maintained that premiums were driven upwards 
by increasing rates of claims and increasing average 
payments on successful claims. Premium hikes from 
1983 through 1986 culminated in a total premium bill 
for malpractice liability insurance of $6 billion in 
1987, up from $60 million in 1960 (while medical 
costs were rising to over $500 billion, up from $25 bil¬ 
lion in 1960). Over the last two years, premiums have 
moderated, and in some high-risk states have even 
fallen. 1 However, for reasons we will sketch in this 


* A background paper prepared for the Pepper Commission by Paul 
Weiler, Professor of Law, Harvard Law School; Chief Reporter, American 
Law Institute Project on Compensation and Liability for Product and Proc¬ 
ess Injury and Member, Harvard Medical Practice Study and Troyen A. 
Brennan, Assistant Professor, Harvard Medical School; Lecturer on Law, 
Harvard Law School; Consultant, American Law Institute Project on Com¬ 
pensation and Liability for Product and Process Injury and Member, Har¬ 
vard Medical Practice Study, February 21, 1990. 

1 See “Medical Malpractice Insurance Rates Fall,” Wall Street Journal, 
April 28, 1989, B-l and “Costs of Medical Malpractice Drop After an 11 
Year Climb,” New York Times, June 11, 1989, Al, col. 2. 

In 1986 and 1987, during the height of the increase in premiums, predic¬ 
tions regarding the costs of premiums in 1988 ranged between 8.5 and 10.2 
billion dollars. See Department of Health and Human Services, Report of the 
Task Force on Medical Liability and Malpractice (August 1987) 4. 


paper, it is doubtful that the spiral of the mid-1980s 
will be the last. We can expect, and we should be 
better prepared to handle, another bout of the prob¬ 
lems inherent in our system of malpractice litigation. 

Many of these problems are rooted in the volatility 
of malpractice insurance premiums. Historically, mal¬ 
practice premiums have followed a path of sudden 
steep increases followed by a few years of modera¬ 
tion. 2 After a slow, but steady upward trend through¬ 
out the 1960s, total premiums doubled from 1974 to 
1976, reaching the billion dollar mark in that latter 
year. 3 By 1982, the nation’s bill for premiums had 
passed $2 billion, and then spiralled again to $6 billion 
by 1987. 4 

One should put these aggregate costs of medical 
malpractice insurance in perspective, by relating them 
to the total health care costs for the nation. In 1987, 
when health care costs were roughly $500 billion, 
medical malpractice premiums consumed slightly 
more than one percent of our health care dollars (up 


2 Throughout this discussion, we rely on several empirical studies of pre¬ 
miums. Among these are: National Association of Insurance Commissioners, 
Medical Malpractice Closed Claims, 1975-1978 (1980); General Accounting 
Office, Medical Malpractice Insurance Costs (Washington, D.C.: 1986); Gen¬ 
eral Accounting Office, Medical Malpractice: Characteristics of Claims Closed 
in 1984 (Washington, D.C.: 1987); New York State Department of Health, 
Physicians Malpractice Claims Closed 1980-1983 (1986) (NY Closed-Claims 
Study); Florida Academic Task Force for the Review of the Insurance and 
Tort System, Preliminary Fact Finding Report on Medical Malpractice (1987) 
(Florida Academic Task Force). More recent data includes: Danzon, “Medi¬ 
cal Malpractice Liability,” in Liability: Perspectives and Policy, eds. Litan and 
Winston (1988), 101-127; Sloan and Bovbjerg, Medical Malpractice: Crisis Re¬ 
sponse and Effects (Health Insurance Association of America, 1989); and Phy¬ 
sicians and Surgeons Update: The Saint Paul's 1989 Annual Report to Policy 
Holders (1989). This latter document has the most recent data available re¬ 
garding the premiums of St. Paul’s, the major national malpractice carrier, 
which announced there will be a 14.1 percent decrease effective July 1, 1989. 

3 See Danzon, The Frequency and Severity of Malpractice Claims. (Santa 
Monica, Calif.: The Rand Corporation) (R-2870-ICJ/HCFA), 1982. 

4 The General Accounting Office had estimated that insurance costs for 
physicians in hospitals increased from 2.5 billion dollars in 1983 to 4.7 billion 
dollars in 1985. General Accounting Office, Medical Malpractice: Framework 
for Action (Washington, D.C.: 1987) 2. The American Medical Association es¬ 
timated that professional liability premiums were 5.7 billion dollars in 1985. 
American Medical Association, Trends in Health Care (Chicago: AMA), 
1987. 


43 




from .5% of health care dollars in I960). 5 True, $4 
billion of these premiums charges were borne by phy¬ 
sicians, as compared with $103 billion spent on physi¬ 
cians services. But while malpractice premiums do 
represent a somewhat higher share of physician serv¬ 
ices, four percent of gross physician revenues is not 
an extraordinarily high bill to pay for liability 
insurance. 

These overall figures, however, tend to understate 
the acuteness of the problem in specific situations. 
There is a great deal of variation in premiums by spe¬ 
cialty and by geographic location. 6 For example, 
while general practitioners in Indiana or allergists in 
Arkansas paid less than $2000 in 1985, 7 obstetricians 
or neurosurgeons in New York City were paying (or 
having paid on their behalf) from $150,000 to 
$200,000 annually. 8 Even more disruptive is the fact 
noted earlier that premiums increased very quickly in 
the mid 1970s and in the mid 1980s. For instance, in 
many large states, surgical and obstetrical premiums 
increased three to four hundred percent in the period 
from 1980 to 1986. 9 In addition to these financial ex¬ 
penses of insurance premiums, more and more physi¬ 
cians faced the personal stress of lawsuits brought by 
their own patients. 

Beyond these fairly well documented concerns 
about insurance premiums and litigation stress are 
certain other costs of medical malpractice. First, pre¬ 
miums are not the only social costs attributable to 
malpractice litigation. Physicians and their representa¬ 
tives emphasize that professional liability premiums 
are smaller than the costs of defensive medicine. The 
American Medical Association (AMA), for instance, 
estimates that in 1985, the total cost of defensive 
medicine was $11.7 billion for physician services 
alone. 10 Others are less certain of the costs associated 
with defensive medicine, partly because the concept 


5 Levit and Freeland, “National Medical Care Expenditures,” Health Af¬ 
fairs (Winter 1988): 124. See also Weiler, Medical Malpractice (ALI Back¬ 
ground Paper, 1987). 

6 Premiums are based on claims history of the geographic location and the 
individual specialty. Since certain specialties are known to lead to many more 
claims than others, specialty designation has the greatest impact on one’s in¬ 
surance premium. For instance, St. Paul’s rates specialties according to eight 
classes. Family practice, class four, is indexed at 1.0. Physicians who do no 
surgery, including allergists, dermatologists and psychiatrists, are in class 1A 
and indexed at .32. On the other hand, neurosurgical physicians are in class 
eight, and are indexed at 3.48. This means that in a given state, if family prac¬ 
titioners are charged $10,000 for malpractice premiums, psychiatrists are 
charged $3,200 and neurosurgical physicians are charged at least $35,000. In 
major metropolitan areas, malpractice premiums are quite a bit higher. For 
instance, St. Pauls charged class four physicians $43,900 in California in July 
of 1989. In Los Angeles, however, those physicians are charged $53,600. 
This compares with the $6,800 St. Pauls charges class four physicians in 
Arkansas. 

7 See General Accounting Office, Medical Malpractice: Insurance Costs 
(Washington, D.C. 1986). 

8 See Florida Academic Task Force, 27. 

9 See Bovbjerg and Sloan, Medical Malpractice. 

10 See AMA, Trends in Health Care. 


itself is elusive. 11 Defensive medicine is defined as 
care provided solely to decrease the potential for a 
lawsuit, in contrast to care that helps diagnose or 
treat a patient’s ailment. What some term defensive 
practice, others might see as appropriate care elicited 
by the incentive effect of malpractice litigation. How¬ 
ever, adding the direct costs of litigation to those of 
defensive medicine, some researchers calculated that 
in 1984 malpractice litigation cost $13.7 billion, 12 (just 
prior to the last big jump in premiums). 

Another social cost is decreased access to care 
when malpractice litigation drives some physicians 
out of certain specialties and out of particular geo¬ 
graphic locations. This problem is seen most sharply 
in studies of obstetrical services in low-income areas, 
where obstetricians, family practitioners or clinics are 
reducing this part of their practice, they say, due to 
the economic interaction of Medicaid cost contain¬ 
ment and rising malpractice premiums. 13 Indeed, the 
Institute of Medicine’s recent report on the delivery 
of obstetrical care focused on this particular issue, and 
emphasized that some relief from the burden of mal¬ 
practice litigation must be given to individuals provid¬ 
ing obstetric care for low-income women. 14 

The question remains, however, whether all these 
attendant costs of medical malpractice really do jus¬ 
tify large-scale changes in the tort liability approach. 
To understand the most significant problems with the 
liability system, it is necessary to examine the appara¬ 
tus in some detail and assess the strengths and weak¬ 
nesses of its component institutions. In the following 
section, we will analyze the roles played by insurers, 
lawyers and health care providers in the overall in¬ 
crease in medical malpractice liability costs. 


INSTITUTIONAL ANALYSIS 
Insurers 

Some have accused the insurance industry of creat¬ 
ing the malpractice crisis in order to bring about in¬ 
creases in premiums. For instance the president of the 
Association of Trial Lawyers of America has stated, 
“the insurance industry itself has created the situation 
and now seeks to profit from it.” 15 Consumer advo- 


11 See Tancredi and Barondess, “The Problem of Defensive Medicine,” 
Science 200 (1978): 879. 

12 See Reynolds, Rizzo, and Gonzalez, “The Cost of Medical Professional 
Liability,” JAMA 257 (1987): 2776. 

13 See Hughes, Rosenbaum, Smith and Fader, “Obstetrical Care for Low- 
Income Women: The Effects of Medical Malpractice on Community Health 
Centers, in Institute of Medicine,” Medical Professional Liability in the Deliv¬ 
ery of Obstetrical Care, vol. 2, 59-78. 

14 See Institute of Medicine, Medical Professional Liability in the Delivery of 
Obstetrical Care, vol. 1, (1989): 1-14. 

15 See Perlman, Presidents Page, Trial, January 1986, 5. 


44 




cates have made much the same charge. 16 That senti¬ 
ment was reflected in the comment of J.B. Spence, 
one of the country’s leading personal injury attorneys, 
who stated: “The insurance industry in this country 
has a gun to the head of the doctors [and t]he doctors 
in turn have a gun to the head of the legislatures.” 17 
This same diagnosis was made about the crisis 
atmosphere surrounding tort law generally in the 
mid 1980’s, and the “reforms” this atmosphere 
provoked. 18 

These accusations seem to have little merit, at least 
with regard to medical malpractice insurance. To our 
mind the largest share of the problem is the volatility 
of the liability insurance line. Insurance companies 
must rely on the predictability of the legal risk to be 
able to set their premiums, 19 but predictability is diffi¬ 
cult to achieve in malpractice. To price their policies 
actuaries must try to estimate the frequency (under an 
“occurrence” policy) or at least the severity (under a 
“claims made” policy) of suits that will not finally be 
resolved for a decade or more. During this “long 
tail,” there can be, and have been, substantial changes 
in patient propensities to sue and jury sentiments 
regarding awards. 20 Aggravating this problem is the 
insurance cycle—i.e., fluctuations in premiums attrib¬ 
utable to changes in investment earnings on revenues, 
interest rates, the stock market, and the value of the 
dollar. 21 

By contrast, the collusion hypothesis seems in¬ 
herently implausible. 22 Collusion is rarely seen in an 
industry that has a comparatively low level of con¬ 
centration in antitrust terms, as has the insurance in¬ 
dustry. Moreover, any cartel formed in the insurance 
industry would be difficult to maintain, because cartel 
members can too easily attract business by improving 


16 See Horwitz, “Nader Charges Insurers with Price Gouging,” Washing¬ 
ton Post, January 7, 1986, Dl, col. 6. 

17 See J.B. Spence, Testimony Before Academic Task Force for Review of 
the Insurance and Tort Systems, Vol. 2 at 136 (Miami, Fla., February 3, 
1987), cited in Nye, Gifford, Webb, Dewar, “The Causes of the Medical 
Malpractice Crisis: An Analysis of Claims Data and Insurance Company Fi¬ 
nances,” Georgetown Law Journal 76 (1988): 1495. 

18 See Nader, The Assault on Injured Victims’ Rights, Denver University 
Law Review 64 (1988): 625. 

19 See generally, Abraham, Distributing Risk (1985). 

20 George Priest has explored the problems posed for insurance by tort 
law generally. See Priest, “The Current Insurance Crisis and Modem Tort 
Law,” Yale Law Journal 96 (1987): 1521 and Priest, “The Antitrust Suit and 
the Public Understanding of Insurance,” Tulane Law Review 63 (1989): 999. 
Priest's concerns regarding eroding risk pools do not appear to be applicable 
to malpractice insurers. 

21 See Abraham, The Causes of the Insurance Crises in New Directions in 
Liability Law, ed. W. Olson (New York: Academy of Political Science 1988). 

22 See Priest, “The Current Insurance Crisis,” and Priest, “The Public 
Understanding of Insurance,” and most of the articles in the Symposium, Per¬ 
spectives on the Insurance Crisis, Yale Journal of Regulation 5 (1988): 367- 
516. The case for collusion is made in National Association of Attorneys 
General, An Analysis of the Causes of the Current Crisis of Unavailability and 
Unaffordability of Liability Insurance, May, 1986. A group of state attorneys 
general did file an antitrust suit against major casualty insurers: see In re In¬ 
surance Antitrust Litigation, 723 F. Supp. 464 (N.D. Cal. 1989). The suit was 
dismissed on McCarran-Ferguson grounds. See also Ayres and Siegelman, 
“The Economics of the Insurance Antitrust Suit: Towards an Exclusionary 
Theory,” Tulane Law Review 63 (1989): 971. 


the terms of coverage at the fixed price. In addition, 
during the malpractice crisis of the 1970s, and the 
product and municipality crisis of the 1980s, as big a 
feature of the problem was a lack of availability of in¬ 
surance. It seems odd for a cartel to refuse to sell its 
products at even unduly high prices. Finally, and 
most importantly for medical malpractice, a substan¬ 
tial portion of this coverage is offered by “bedpan 
mutuals,” insurance companies controlled by the doc¬ 
tors and hospitals themselves. 23 There is no reason to 
suppose that these carriers would be a part of a 
scheme to price gouge their own principals. For those 
several reasons the collusion hypothesis lacks theoreti¬ 
cal economic support. 

In addition, empirical analysis of long-term insur¬ 
ance premiums and costs supports quite a different di- 


23 The malpractice insurance industry has changed a great deal in the past 
decade. Physicians in private practice traditionally purchased insurance di¬ 
rectly from malpractice insurers. Those physicians who worked for hospitals 
or Health Maintenance Organization (HMOs) had their malpractice insurance 
purchased by their employer. Since the late 1970s, however, more and more 
hospitals have chosen to self-insure rather than buying commercial insurance. 
Indeed a survey in 1980 indicated that there were already nearly 1,000 hospi¬ 
tals self-insured. See Needleman and Hackbarth, “The Malpractice Insurance 
System in Obstetrical Care: Recent Experience and Options for Change.” 
Paper prepared for the Institute of Medicine. Washington, D.C. (1988). This 
self-insurance phenomenon undoubtedly accelerated during the malpractice 
crisis of the 1980s as all premiums increased dramatically. 

Self-insurance is not the only change that has occurred in malpractice 
underwriting. As noted, before the insurance crisis of the mid-1970s, mal¬ 
practice insurance for individual physicians was typically provided by 
commercial insurers. After this malpractice crisis, there was a great deal of 
consolidation in the market as many insurers withdrew. Medical societies 
themselves created their own insurance companies. The largest of these, the 
Medical Liability Mutual Insurance Company of New York, now possesses 
nearly 40 percent of the New York state market and nearly six percent of the 
overall national market. See Stern, “Medical Malpractice, Fidelity Insur¬ 
ance.” Bests Review 89 (1988): 34. Hospital associations also developed insur¬ 
ance companies. The largest of these, the Pennsylvania Hospital Insurance 
Company, possesses 33 percent of the Pennsylvania hospital malpractice 
market. These so-called bedpan mutuals are, as one would expect, responsive 
to providers’ input. This does not mean that they will be imm une from 
market forces, or that they will behave differently than other insurers when 
faced with rising claims rates and increased severity of claims. One would 
expect, however, that they would be unwilling to act in collusion with other 
insurers in any effort to raise premiums artificially high. 

In certain states, state legislatures had to step in to provide alternatives 
when the majority of medical malpractice insurers withdrew from the 
market. Most states created joint underwriting associations (JUAs), which are 
non-profit pooling arrangements funded initially by all entities providing in¬ 
surance in a particular state. After the initial capital investment, the JUAs are 
intended to be self-supporting through physician premiums. At present, 13 
states have functioning JUAs, with market shares ranging from three percent 
in Kansas to 83 percent in Rhode Island in 1986. See Kenney, Financial Con¬ 
dition of Medical Malpractice JUAs. (Shalmberg, Ill.: Alliance of American In¬ 
surers) (1987). Since insurance companies can face annual assessments if JUA 
deficits develop, the insurance industry keeps a close eye on the vitality of 
JUA programs. 

The rest of medical malpractice insurance is offered by commercial in¬ 
surers. Some insurers, such as the St. Paul’s group, offers insurance in many 
states. 

Most malpractice policies are structured in a similar fashion. Medical mal¬ 
practice insurance policies typically involve both monetary limits on individ¬ 
ual claims or occurrences, and aggregate amounts that will be paid over a 
policy year. In some states, the limits are as low as $100,000 per occurrence 
and $300,000 in aggregate. More typical, is a minimum amount of $400,000 
per occurrence and $1 million in aggregate, while many states have moved to 
policies involving $1 million per occurrence and $3 million in aggregate. 
There is very little experience rating in the medical malpractice insurance in¬ 
dustry. Hospitals usually have much higher annual limits, ranging between 
five and thirty million dollars. See Institute of Medicine, supra note 15, 
Volume 1, Chapter 6, Obstetrical Malpractice Insurance. 


45 




agnosis. 24 In both New York and Florida, careful 
studies have documented the relationship between 
premiums and costs in the medical malpractice area. 
For example, the Florida Academic Task Force found 
that the primary cause in that state of increased mal¬ 
practice premiums over the years 1980 to 1988 was 
the substantial increase in loss payments to claimants. 
The Task Force also demonstrated that insurance 
company profits are roughly equivalent to the profits 
made by other corporations in the United States. 25 
There appears to be little support, then for the con¬ 
tention that the malpractice crisis was the result of in¬ 
surance monopoly and excess profits. 


Litigation System 

The litigation system creates pressure for growth in 
malpractice premiums when there is either an increase 
in the number of claims being brought against insured 
individuals or institutions, or when the average pay¬ 
ment on (i.e., the severity of) individual claims rises. 
Throughout the 1970s and much of the 1980s, both 
the frequency and severity of claims increased 
dramatically. 26 

Overall, between 1975 and 1984, Danzon estimates 
that there was an average increase of 10 percent per 
year in claims brought against physicians, and that 
during the period from 1982 to 1986, the claim fre¬ 
quency per 100 physicians rose from 13.5 to 17.2 per 
year. 27 It appears that claims rates are now back 


24 The New York figures are contained in the Report of New York State 
Insurance Department on Medical Malpractice, A Balanced Prescription for 
Change (New York: 1988). 

25 See Nye et al., “The Causes of the Medical Malpractice Crisis,” 1499. 
At the same time, the claims made by insurance companies that the malprac¬ 
tice line of insurance is unprofitable have been refuted by reports from the 
General Accounting Office (GAO). One study by the GAO concluded that 
profitability estimates for the medical malpractice line of insurance depends 
primarily on the adequacy of reserves for future payments of claims and the 
accounting principle used to estimate the value of the reserves. Using its own 
recommended accounting principles, the GAO determined that for the years 
1975 to 1985 the malpractice line was quite profitable (estimated profitability 
being $2 billion): See General Accounting Office, Insurance—Profitability of 
the Medical Malpractice and General Liability Lines (Washington, D.C.: July, 
1987). Another GAO study showed that of the property/casualty insurance 
lines that became insolvent from 1969 to 1978, none had medical malpractice 
as a primary line: see General Accounting Office, Insurer Failures — Property/ 
Casualty Insurer Insolvencies and State Guaranty Funds (Washington, D.C.: 
July, 1987). 

26 The following empirical information is drawn from the same sources as 
were cited in footnote 2. We should note that claims data is notoriously unre¬ 
liable. As Jacobson remarks “In evaluating these data, some important 
limitations must be considered. Aside from major gaps in available data, the 
reported data cannot be compared easily. Each data-reporting system used a 
different standard for defining the principal allegations of negligence, and 
each system uses different assumptions and numerical bases for data report¬ 
ing. Some report data from all claims and expenses (ie, defense costs), includ¬ 
ing settlements and those in which no indemnity was paid. Others report 
averages only on a claims-paid basis or by looking at nonzero jury awards 
alone. Because many of the claims filed result in no indemnity payments, 
how those are incorporated into the figures makes a major difference in the 
apparent scope of the problem. One result of these different approaches is 
that estimates of average verdicts vary widely and statements about averages 
need to be scrutinized.” Jacobson, “Medical Malpractice and the Tort 
System,” JAMA 262 (1989): 3322. 

27 Danzon, “Medical Malpractice” in Liability, 103. 


down to 13/100 physicians per year. 28 As one might 
expect, claims vary a great deal by specialty. 29 Over¬ 
all, however, it appears that somewhat more than one 
in twenty physicians are sued successfully each 
year. 30 

The mean amount paid for each claim is an even 
more important determinant of the legal cost pres¬ 
sures placed on insurers. There is little doubt that the 
size of malpractice claims rose a great deal during the 
1970s and 1980s. Part of the increase in severity ap¬ 
pears due to large jumps in jury verdicts. For exam¬ 
ple, the average award in jury verdicts jumped from 
$200,000 in 1974 to almost $650,000 in 1984 for mal¬ 
practice cases in the California Superior Courts. 31 
(To put this in some perspective, we should note that 
health care costs increased on the order of 60-70% 
over the same period.) These high jury verdicts 
induce, in turn, higher settlement amounts. The aver¬ 
age malpractice settlement rose from under $12,000 in 
1970 to $26,000 in 1975, to $45,000 by 1980, reached 
$80,000 by 1984 and topped $100,000 by 1986. 32 As 
one might expect there is a great deal of variation 
from state to state in claims severity. 33 For example, 
the Florida Academic Task Force has emphasized the 


28 Physicians and Surgeons Update, 1. 

29 The AMA estimates that before 1981, there were 3.2 claims per 100 
physicians per year, and that by 1985, the incidence had tripled to 10.1. For 
obstetrician/gynecologists, the average annual incidence rose from 7.1 per 
100 physicians in 1981, to 26.6 by 1985. For all surgeons, the increase was 4.1 
in 1981 to 16.5. See Professional Liability Clearinghouse, American Medical 
Association Center for Health Policy Research, Professional Liability Update 
(Dec. 1986), cited in “Note, The Applicability of Experience Rating to Medi¬ 
cal Malpractice Insurance,” Case Western Reserve Law Review 38 (1987): 255. 

30 The best estimates are that nearly 50 percent of all claims result in some 
sort of compensation for the plaintiff. 

31 See American Medical Association, Professional Liability in the 80s, Re¬ 
ports 1, 2 and 3. (Chicago: AMA, October 1984, November 1984, March 
1985.) While increases in California may have been particularly sharp, they 
are not unrepresentative. The Rand Institute for Civil Justice has developed 
information on jury verdicts in Chicago and San Francisco for the past 
twenty years. Their data indicates that awards for malpractice plaintiffs out¬ 
stripped awards for other high profile tort actions, such as product liability. 
See Shanley and Peterson, Comparative Justice: Civil Jury Verdicts in San 
Francisco and Cook Counties, 1959-1980 (Santa Monica, Calif.: Rand Corpo¬ 
ration, 1983), R-3006-ICJ. Other Rand data suggests that the average jury 
verdict in a malpractice case in these two cities increased from $50,000- 
$100,000 in the early 1960s to $1.2 million in the early 1980s. See Peterson, 
Civil Juries in the 1980s (Santa Monica, Calif.: Rand Institute for Civil Justice, 
1987). In the Miami area, the Florida Academic Task Force reports that jury 
verdicts on behalf of plaintiffs averaged nearly $900,000 from 1985 through 
1987. See Florida Academic Task Force, 147-50. 

32 See Weiler, Legal Policy for Medical Injuries: The Issues, the Options and 
the Evidence (January 1988). Danzon notes that severity increased at double 
the rate of the Consumer Price Index from 1975 to 1984. See Danzon, “Med¬ 
ical Malpractice” in Liability, 105. Bovbjerg and Sloan have estimated that 
the paid claim severity rose from approximately $45,000 per claim in 1980 to 
over $100,000 per claim in 1986. See Bovbjerg and Sloan, Medical Malprac¬ 
tice, 8. 

33 In Arkansas, the average indemnity per paid claim was $31,000 in 1980 
and $51,000 in 1984. See General Accounting Office, Six State Studies (1986). 
In Florida, on the other hand, the average indemnity was $80,000 in 1980 and 
over $140,000 in 1984. Unlike the frequency of claims, it appears that severity 
of claims has continued to increase. St. Pauls, for instance, estimates that the 
cost per claim increased 30 percent from 1982 to 1985. These increases have 
continued, so that the increase from 1982 to 1988 is nearly 80 percent. See St. 
Paul’s Physician Update. 


46 




importance of large awards in driving up the overall 
average severity in Florida. 34 

These huge claims have a much broader effect than 
simply dragging up the average cost per claim. 35 As 
noted earlier, they induce a great deal of variation in 
insurance costs, making it difficult for actuaries to es¬ 
timate total costs in an insurance market that is as seg¬ 
mented and thin as is malpractice. 36 

The data regarding rising numbers of claims and se¬ 
verity of claims, combined with the effects of huge 
jury verdicts or settlements on risk pooling, provide 
strong evidence that the longer term increase in insur¬ 
ance premiums charged individual physicians and hos¬ 
pitals are a result of real changes in tort costs. The 
question remains, why have there been these increases 
in number of claims? Are physicians providing poorer 
quality care or are patients suing more frequently for 
other reasons? Research into iatrogenic injury and 
malpractice litigation can provide some answers to 
these questions. 


Health Care System 

Some have conjectured that the increase in claims 
and severity of claims is simply a matter of potential 
plaintiffs mining a mother lode of potential claims. 
Their assumption is that many potentially “litigable” 
and “compensable” events occur regularly in hospi¬ 
tals, and, in recent years patients are bringing a larger 
percentage of these cases into the tort process. This 
hypothesis is supported by the only published 
empirical study of iatrogenic injury and litigation, 
conducted in California in 1974. 3 7 The results were 


34 In 1975 in Florida, the largest paid claim was 5500,000. In 1979, the 
largest paid claim was $600,000 but in 1981, there was a paid claim of SI.6 
million. In 1984, the largest paid claim was over $5 million. In 1981, there 
were a total of 16 claims for more that $500,000 in Florida, while in 1983 
there were 57 and in 1984 there were 105. Claims worth more than $1 mil¬ 
lion represented 4.9 percent of the total amount of paid claims in 1981, but in 
1986 these claims accounted for 29.1 percent of the total compensation paid. 
See Nye et al., “The Causes of the Medical Malpractice Crisis,’’ 1552. These 
are not the highest claims in the country. Nor has the huge verdict phenome¬ 
non abated. In 1988, the highest personal injury jury vercict in the country 
was rendered against a hospital in Houston for $52 million. See American Bar 
Association Journal, July 1989. 

35 A few large awards lead to great discrepancies between the median 
amount paid per claim, the middle number obtained when the claims are ar¬ 
ranged in ordinal fashion, and the mean amount paid per claim, the amount 
calculated by dividing the total indemnity by the number of claims. For in¬ 
stance, in 1984 the General Accounting Office noted that the median claim 
payments were $18,000 while the mean claim payments were 580,000. See 
General Accounting Office, Medical Malpractice: Characteristics of Claims 
Closed in 1984, 2. 

36 See Priest, “The Current Insurance Crisis," 1545. 

37 In 1974, the California Medical Association and the California Hospital 
Association commissioned a study by Don Harper Mills of the incidence of 
potentially compensable events in hospitals. California Medical Association, 
Medical Insurance Feasibility Study (Sutter Publishing, 1976). Tins study fo¬ 
cused on 23 hospitals which had elected to participate. The researchers ana¬ 
lyzed a sample of 20,864 records of inpatients who had been discharged in 
1974. They defined a potentially compensable event as a disability that had 
been caused by health care management. The research team also evaluated 


disturbing. The overall rate of potentially compensa¬ 
ble events was 4.65 percent; 38 the rate of PCE’s asso¬ 
ciated with negligence was .79%. 39 Using this data, 
and combining it with information from the National 
Association of Insurance Commissioners for 1976 
through 1978, Patricia Danzon estimated that in the 
mid 1970s, less than one out of 10 potentially compen¬ 
sable events associated with negligence gave rise to 
litigation. 40 

The California study suggests that recent increases 
in rates of medical malpractice litigation are caused 
by the fact that more and more litigants are now actu¬ 
ally bringing what always were potentially valid 
claims. 41 Again, though, one must put these statistics 
about medical negligence in context. Modern health 
care is an inherently risky enterprise, employing a va¬ 
riety of intrusive procedures, equipment and drugs to 
combat diseases that would have been left to run their 
(usually fatal) course a generation ago. But however 
sophisticated its science and technology, medicine still 
must rely on the care and attention of doctors, nurses 
and technicians for the use and safety of these proce¬ 
dures. Unfortunately, like all human beings, medical 
personnel are prone to occasional oversights and mis¬ 
takes. But when a usually conscientious surgeon 
makes a momentary inadvertent slip-up—which is 
negligence in the eyes of the law—this exposes the 
patient to severe and irretrievable harm for which a 
tort suit can be brought. 42 Thus, it is revealing that 


whether or not the potentially compensable event was caused by negligence, 
and graded each potentially compensable event according to severity. 

38 Among these PCEs, 35.7 percent led to minor disability of 30 days or 
less and did not require surgery. Another 25.7 percent of the PCEs had 
minor disability that did not exceed 30 days but did require surgery. Major 
disability, lasting for more than 30 days but less than two years, occurred in 
18.6 percent of patients. Another 6.5 percent of PCEs resulted in minor but 
permanent partial disabilities. 2.2 percent of the PCEs gave rise to major per¬ 
manent partial disability and another 1.6 percent gave rise to grave perma¬ 
nent disability. Death occurred in 9.7 percent of PCEs. 

39 Forty-two percent of the PCEs that proved fatal were associated with 
negligence, whereas only 11.9 percent of the PCEs leading to temporary dis¬ 
abilities were caused by negligence. The overwhelming majority of PCEs oc¬ 
curred in the operating room (71.8 percent). 

40 Her estimates suggest that if all cases that could potentially give rise to 
successful tort litigation did so, there would be 10 times the number of claims 
and 20 times the number of paid claims. See Danzon, Medical Malpractice 
(Cambridge, Mass.: Harvard University Press, 1985). Danzon has since esti¬ 
mated that at present greater than one in 10, perhaps as many as one in six or 
seven of potentially compensable events associated with negligence now lead 
to a claim, largely as a result of the increase in the number of claims over the 
period from 1975 to 1986. See Danzon, “The Frequency and Severity of 
Medical Malpractice Claims: New Evidence,” Law and Contemporary Prob¬ 
lems, 49 (1986): 57-84. 

41 Of course, the available empirical information concerning the “mining” 
hypothesis is limited. First of all, the California study was a non-random 
sample, suggesting there may be considerable bias in its results. Moreover, 
little attention was paid during the conduct of the research to methodological 
issues such as reliability and validity of judgments concerning potentially 
compensable events or negligence. In addition, Danzon’s work was based on 
a somewhat inadequate database, the National Association of Insurance Com¬ 
missioners closed-claims data from 1975 through 1978. The Harvard Medical 
Practice Study Group, of which we are members, has just completed a study 
in New York, Patients, Doctors, and Laywers (1990), which addressed these 
concerns: we found that the present gap between negligent injuries and 
actual tort claims is even starker than the California estimates. 

42 See generally Grady, “Why Are People Negligent? Technology, 
Nondurable Precautions and the Medical Malpractice Explosion,” Northwest¬ 
ern University Law Review 82 (1988): 293. 


47 




since the mid 1970’s there has been the same percent¬ 
age increase in malpractice claims and costs in 
Canada and Great Britain (though from a much lower 
base level than the United States), despite their very 
different organization and financing of both legal and 
health care. 43 

But whatever the explanation, the fact is there is no 
evidence we have been experiencing too many mal¬ 
practice claims; if anything there appear to be too 
few. It would seem unfair, then, to encumber even 
further access to the tort system by those injured indi¬ 
viduals with valid claims. On the other hand, large 
awards tend to have an unsettling effect on the insur¬ 
ance system. The erratic nature of awards, especially 
their pain and suffering component, produces unduly 
volatile premium changes during “crisis” periods and 
dislocation in the lives of individual practitioners, 
whether sued successfully or not. 


RESPONSE—PUBLIC POLICY 

In response to the pressure of rising malpractice liti¬ 
gation and premiums, all the state legislatures have 
sought to reform at least some of their law concern¬ 
ing malpractice liability. During the 1970’s and 1980s, 
this effort took the form of “conventional” tort 
reform, under which the legislatures tinkered with dif¬ 
ferent tort doctrines and procedures for malpractice 
claims. In the last few years, though, one finds grow¬ 
ing interest in moving beyond tort law altogether, 
whether into administrative fault or no-fault compen¬ 
sation systems. We will first review conventional tort 
reform and then sketch some of the suggested alterna¬ 
tives to traditional tort litigation. 


Conventional Tort Reform 

A variety of types of conventional tort reform have 
been instituted by state governments in the last two 
decades, most fashioned in response to the first mal¬ 
practice crisis of the mid 1970s. These statutory 
changes, designed to reduce the frequency and sever¬ 
ity of malpractice claims and premiums, are aimed at 
one of three targets: initial access of patients to the 
courts, chances of success in establishing liability, and 
the potential amount of damages awarded. Since most 
of these reforms were instituted in at least some states 
more than a decade ago, sufficient time has elapsed to 


43 See Dewees, Coyte and Trebilcock, Canadian Medical Malpractice Li¬ 
ability: An Empirical Analysis of Recent Trends (1989); Ham, Dingwall, Fenn 
and Harris, Medical Negligence: Compensation and Accountability, (1988): 11- 
12 (on the United Kingdom). 


allow empirical evaluation of the impact of such 
measures. 

We start with changes in liability rules, since this is 
perhaps the most distinctive feature of malpractice 
law. Unlike product liability law, courts have stuck 
closely to the fault principle, as reflected in the rule 
that only deviation from customary medical practice 
will suffice for liability. Few courts have strayed from 
this central assumption; 44 nor have any legislatures 
relaxed it. However, a number of statutory enact¬ 
ments in the 1970s did modify the detailed rules em¬ 
bodying the fault principle, with a view to rolling 
back some of the common-law doctrines developed 
by judges in previous decades to make it easier for pa¬ 
tients to establish physician fault. For instance, the 
judges had largely overturned the old locality doc¬ 
trine under which practitioners were held only to the 
standard of practice in their same locale. Since 1970, 
approximately one dozen state legislatures have 
restated the standard of care by reference to local 
practice. 45 

Another such effort sought to limit the operation of 
the doctrine of res ipsa loquitur. This judicial doctrine 
made it somewhat easier for patients to get a malprac¬ 
tice case to a jury in situations where an apparent 
mishap had led to a poor outcome. Yet another legis¬ 
lative attempt to overcome judge-made law con¬ 
cerned informed consent. In the 1960s and 1970s, 
some courts had defined the standard of informed 
consent in terms of what a reasonable patient needed 
to know, rather than what a reasonable physician felt 
it necessary to disclose. A number of state legislatures 
in turn explicitly enacted the reasonable practitioner 
standard. 46 

A more thoroughgoing method for changing liabil¬ 
ity standards would be to specify that practice guide¬ 
lines developed by physicians should act as definitions 
of the standard of care for courts. Using outcome 
studies 47 and consensus panel determinations of prac¬ 
tice standards, 48 health services researchers have 
begun to develop clinical parameters to determine ap¬ 
propriate care. 49 For instance, the American College 
of Physicians and Blue Cross/Blue Shield have devel¬ 
oped a series of guidelines for common diagnostic 

44 The most notable being Helling v. Carey, 519 P.2d 981 (Wash. 1974). 

45 See Robinson, “The Medical Malpractice Crisis of the 1970s: A Retro¬ 
spective,” Law and Contemporary Problems 49 (Spring, 1986): 6. 

46 See Meisel and Kabnick, “Informed Consent to Medical Treatment: An 
Analysis of Recent Legislation,” University of Pittsburgh Law Review 41 
(1980): 407. 

47 See Wennberg, Mulley, Hanley et al., “An Assessment of Prostatectomy 
for a Benign Urinary Tract Obstruction: Geographic Variations in the Eval¬ 
uation of Medical Outcomes, "JAMA 259 (1988): 3027. 

48 See Kahn, Kosecoff, Chassin, et al., “The Use and Misuse of Upper 
Gastrointestinal Endoscopy,” Annals of Internal Medicine 109 (1988): 664-70. 

49 See Brook, “Practice Guidelines and Practicing Medicine: Are They 
Compatible?” JAMA 262 (1989): 3027. 


48 




tests. 50 While some may question the validity of such 
parameters 51 it seems likely that development of 
medical practice algorithms will accelerate. Indeed, 
recent legislation creates new opportunities for re¬ 
search on and development of, these methods, 52 and 
this Commission has recommended as part of a na¬ 
tional system of quality assurance that national prac¬ 
tice guidelines and standards of care be developed in 
a newly created agency for Health Care Policy and 
Research. 

Similar practice guidelines could also be used to 
determine the standard of care for malpractice pro¬ 
ceedings. However, their development is a very com¬ 
plicated and lengthy process. Therefore, while we 
now see the first uses of such guidelines in an effort 
to improve care and decrease litigation, 53 it is doubt¬ 
ful they will play a major role in the near future. 

Another set of tort reforms placed a variety of re¬ 
strictions on what was perceived as too easy access to 
common law courts. 54 One way to do this was to 
shrink the statutory limitation period. Using a judge 
fashioned discovery doctrine, many state courts inter¬ 
preted their statute of limitations as not being tolled 
until a victim had, or should have, discovered that his 
injury was a result of doctor negligence. This innova¬ 
tion tended to give plaintiffs a much broader time 
span in which to file their suit. In response, a number 
of states repealed the discovery rule or required that 
claims be brought within a so-called statute of repose 
that set an outer bound to the discovery principle. 55 
The rationale is that doctors and their insurers should 
enjoy some protection against litigation launched long 
after the original treatment, when there is consider¬ 
able risk that the events will be appraised in light of 
quite different legal and medical norms than could 
fairly have been anticipated at the time. 

Another such access rule was the limitation of at¬ 
torney’s fees. Plaintiff attorneys take malpractice cases 
on the basis of a contingent fee, meaning that if and 
only if the plaintiff wins, the lawyer takes his com¬ 
pensation as a percentage of the award. In response to 
physicians’ concerns about the incentives this arrange¬ 
ment created for malpractice suits, many jurisdictions 
restricted the size of attorneys’ fees, typically by im¬ 


50 See Sox, “Guidelines for Medical Practice: Necessary But Not Suffi¬ 
cient,” Journal of General Internal Medicine 6 (1989): 551. 

51 See Alper, “ACP Guidelines for Common Diagnostic Tests in the Prac¬ 
ticing Internist," Journal of General Internal Medicine 6 (1989): 548. 

52 See Omnibus Budget Reconciliation Act of 1989, P.L. 101-239, sec. 
6103. 

53 Berwick, “Continuous Improvement as an Ideal in Health Care. .\ew’ 

England Journal of Medicine 320 (1989): 53. 

54 See Bovbjerg, “Legislation on Medical Malpractice: Further Develop¬ 
ments and a Preliminary Report Card,” University of California at Davis Law 
Review 22 (1989): 499. 

88 See McGovern, ‘The Variety, Policy and Constitutionality of Product 
Liability Statutes of Repose," American University Law Review 30 (1981): 579. 


posing a flat percentage or by constructing a sliding 
scale based on the size of the award. For a time, Flor¬ 
ida even experimented with the Anglo-Canadian rule 
of awarding fees to the prevailing party, but this law 
was replaced by a sliding scale based on timing of set¬ 
tlement and size of award. 56 

Yet another way to limit access was to institute 
screening panels. Screening panels are composed of 
doctors and lawyers who review a case and evaluate 
its merits before a claim is filed. These screening 
panels are intended to decrease access to the legal 
system by influencing parties’ evaluations of their 
probability of success in courts. While many states 
adopted screening panels in the mid-1970s, there has 
been less enthusiasm for them in the 1980s, largely be¬ 
cause the panels have had little impact except to pro¬ 
long the length of time and costs before resolution of 
a suit. 57 

Finally, state legislatures have experimented with 
limits on damages, again in an effort to moderate the 
number and severity of claims. One such measure is 
periodic rather than lump sum payment of large 
damage awards: this allows the court to adjust the 
award to subsequent changes in health status of the 
victim. Another way to restrain damage awards is to 
reverse the collateral source rule, under which the 
courts traditionally held that damages payable by cul¬ 
pable defendants should not be reduced even if the 
patient’s loss has been compensated by other sources, 
such as health or disability insurance. 58 Numerous 
states have responded to the arguments that this is a 
form of “double dipping,” either by allowing defend¬ 
ants to introduce evidence concerning sources of 
compensation such as health and disability insurance, 
or even mandating that the courts deduct any such 
collateral insurance payments from tort awards. Of 
course, offsetting such collateral sources can reduce 
the deterrent threat of litigation, given that physicians 
would have a reduced responsibility for the social 
costs of medical injuries and personal injury lawyers 
whose fees are a percentage of the total damage 
award would have less inclination to pursue claims on 
behalf of a well insured individual, even when the 
care the individual received may have been grossly 
substandard. 


86 See Hawkes, “The Second Reformation: Florida’s Medical Malpractice 
Law,” Florida State Law Review 13 (1985): 747. 

87 See Danzon and Lillard, “Settlement out of Court: The Disposition of 
Medical Malpractice Claims,” Journal of Legal Studies 12 (1983): 373-4; 
Shmanske and Stevens, “The Performance of Medical Malpractice Review 
Panels,” Journal of Health Politics, Policy and Law 11 (1986): 525. 

88 See generally Moceri and Messini, “The Collateral Source Rule in Per¬ 
sonal Injury Litigation,” Gonzaga Law Review 7 (1972): 310. Although it has 
attracted little attention from state legislatures, the concept of scheduling 
damages gained some scholarly support as a method for rationalizing the 
damage determination process: see Danzon, “Tort Reform and the Role of 
Government in Insurance Markets,” Journal of Legal Studies 13 (1984): 
527-30. 


49 




The most straightforward form of damages re¬ 
striction is the damage cap. As mentioned above, a 
relatively small number of large awards comprise a 
substantial share of the total amount of money paid in 
tort claims. Since the mid 1970s, states have experi¬ 
mented with caps on damages. Some states place nu¬ 
merical limitations on pain and suffering. In the 1970s, 
most of these numerical restrictions applied to both 
economic and non-economic damages, 59 but in the 
1980s almost all have focused simply on pain and 
suffering. To this point only a handful of states have 
indexed or adjusted their nominal dollar caps to sub¬ 
sequent changes in wage and price levels. 60 

The efficacy of various tort reforms have been as¬ 
sessed by economists and health policy analysts using 
econometric methods. 61 Danzon, for example, traced 
the effect of mid-1970s legislation over an extended 
period of time and updated her research with claims 
information as late as 1984. She demonstrated that re¬ 
ductions in the statute of limitations result in a sig¬ 
nificant decrease in claims frequency. Moreover, the 
reversal of a collateral source rule reduced claims se¬ 
verity by somewhere between 11 and 19 percent, and 
claims frequency by around 14 percent. Finally, caps 
on damage awards reduced claims severity by 23 per¬ 
cent, but did not seem to have any effect on the pro¬ 
pensity to initiate claims. 

In a more recent study, Sloan and co-authors com¬ 
bined data on individual closed claims from the Na¬ 
tional Association of Insurance Commissioners’ Study 
of Closed Claims From 1975-1978 with closed claims 
information from 1984 collected by the General Ac¬ 
counting Office of the United States Congress, and 
analyzed the effect of tort reforms on claims’ sever¬ 
ity. 62 Just as did Danzon, Sloan et al. found few tort 


59 See e.g., Indiana Code Annotated, Section 16-9.5-2-2.1 (Bum’s Supple¬ 
ment 1986). 

80 We have reviewed the major forms of tort reform in the 1970s and 
1980s, but our list is not exhaustive. For instance, Bovbjerg’s review of tort 
reforms touches on arbitration as an effort to limit the number of suits getting 
into court, restrictions of ad damnum clauses as a method for decreasing the 
size of recovery; expert witness standards as means of increasing the plain¬ 
tiffs difficulty or cost of winning; and precalendar conference requirements 
and preferred scheduling for malpractice cases as means of decreasing the 
costs of the judicial process. See generally Bovbjerg, “Legislation on Medical 
Malpractice,” 499. 

61 The most recent of these empirical analyses are Danzon, “The Fre¬ 
quency and Severity of Medical Malpractice Claims: New Evidence,” Law 
and Contemporary Problems 49 (1986): 37-56; and Sloan, Mergenhagen and 
Bovbjerg, “Effects of Tort Reforms on the Value of Closed Medical Mal¬ 
practice Claims: A Microanalysis,” forthcoming, Journal of Health Policy, 
Politics, and Law. Unless otherwise stated we rely on these authors’ analyses. 
This is not to overlook some of the important research which was done 
before 1985. See, in particular Reder, “An Economic Analysis of Medical 
Malpractice,” Journal of Legal Studies 5 (1976): 267; Feldman, “The Determi¬ 
nants of Medical Malpractice Incidence: Theory of Contingency Fees and 
Empirical Evidence,” Atlantic Economic Journal 1 (1979): 59; Danzon, “The 
Frequency and Severity of Medical Malpractice Claims,” Journal of Law and 
Economics 27 (1984): 115; Adams and Zuckerman, “Variations in the Growth 
and Incidence of Medical Malpractice Claims,” Journal of Health Politics, 
Policy and Law 9 (1984): 475; Sloan, “State Responses to the Malpractice In¬ 
surance Crisis of the 1970s: An Empirical Analysis,” Journal of Health Poli¬ 
tics, Policy and Law 9 (1985): 629. 

62 See Sloan, Mergenhagen and Bovbjerg, “Effects of Tort Reform.” 


reforms that reduced the amount paid per claim. 
However, damage caps on the total awards, and even 
caps on just pain and suffering, substantially lowered 
the amounts paid. As well, changes in the collateral 
source rule produced sizable reductions in average 
payments. Laws that encouraged arbitration de¬ 
creased the amount paid per claim, while changes in 
the statute of limitations reduced the likelihood that a 
claim would be closed with payment but did not 
affect the overall amount per paid claim. All the other 
reforms had little statistically significant impact. 

Several conclusions can be drawn from these stud¬ 
ies. First, it appears that changes in liability rules have 
little effect: malpractice litigation remains fault-based 
at its core and legislative tinkering changes this very 
little. Statutory obstacles to access also seem to have 
little effect, with the exception of changes in statutes 
of limitations. However, alterations in damage rules— 
i.e., caps or collateral source offsets—do have a sig¬ 
nificant effect on both the severity of claims or even 
the number of claims brought. 

As one might have gathered from this review of 
the content of malpractice reform, most of these 
measures have been proposed by medical associations 
and championed by their legislative supporters. How¬ 
ever, when a state legislature enacts a tort reform 
package, the legal dialogue does not end there. Pa¬ 
tients and their attorneys can return to the state 
courts for decisions about how to treat the new statu¬ 
tory law—in particular, under the state constitution. 
After a decade of such constitutional challenges, it ap¬ 
pears that patients have fared quite well in the judicial 
forum, with many of the state courts having struck 
down some the key reforms, especially in the damages 
area. 63 

Malpractice reform bills can be attacked under both 
the federal and various states’ constitutions. Under the 
Federal Constitution, courts have largely rejected 
equal protection, due process and Seventh Amend¬ 
ment challenges. 64 State courts have been much less 
deferential in their constitutional scrutiny of malprac¬ 
tice legislation. As part of a general resurgence of 
state constitutional activism, 65 state judges have been 


63 See in general, Vinson, “Constitutional Stumbling Blocks to Legislative 
Tort Reform,” Florida State Law Review 15 (1987): 31; Turkington, “Consti¬ 
tutional Limitations on Tort Reform,” Villanova Law Review 32 (1987): 1299; 
Smith, “Battling a Receding Tort Frontier: Constitutional Attacks on Medi¬ 
cal Malpractice Laws,” Oklahoma Law Review 38 (1985): 195; Learner, “Re¬ 
strictive Medical Malpractice Compensation Schemes: A Constitutional quid 
pro quo Analysis to Safeguard Individual Liberties,” Harvard Journal on Leg¬ 
islation 18 (1981): 143. 

64 See e.g., Fein v. Permanente, 695 P. 2d 665, 38 Cal. 3d 137, 211 Cal. 
Rptr. 368 (1985), appeal dismissed, 106 S.Ct. 214 (1986). 

65 See Brennan, “The Bill of Rights in the States: The Revival of State 
Constitutions as Guardians of Individual Rights,” New York University Law 
Review 61 (1986): 535. 


50 




especially offended when they perceive physician 
groups having secured statutory measures that sub¬ 
stantially cut back on the tort rights of injured pa¬ 
tients without the latter receiving some form of quid 
pro quo along the lines of no-fault workers’ compensa¬ 
tion. That judicial sentiment has been displayed in a 
number of constitutional guises; in the 1970s usually 
under equal protection or due process, but in the 
1980s more often under the right of access to the 
court or to a jury trial. 66 

It is no accident that this judicial sentiment tends to 
surface in challenges to the constitutionality of restric¬ 
tions on tort damages. While these are the measures 
that do offer the greatest relief to doctors from the 
burden of the malpractice regime, the cases where the 
caps are applied often involve the most seriously in¬ 
jured patients, and in situations where judges realize 
that some of the supposedly “excess” award is really 
going to pay the percentage contingent fee of the at¬ 
torney whose services were necessary to secure any 
tort recovery for the injured party. In addition, as we 
have seen, the conclusion of more systematic research 
is that under the common law system, there are far 
fewer malpractice claims being made (let alone paid) 
in the legal system than there are malpractice events 
and injuries occurring in the health system. 

One other alternative for overcoming the deficien¬ 
cies of the present system might be to move from a 
tort to a contract regime. Some have argued that tort 
law smacks too much of “command and control” reg¬ 
ulation, and thus retards the efficiencies and inno¬ 
vation that could arise out of a “free market” 
approach. 67 They advocate much broader scope for 
voluntarily-negotiated contracts between patients and 
providers which would stipulate whether and how 
much compensation should be paid for injuries oc¬ 
curring in the course of therapy. In theory, these con¬ 
tractual alternatives would be more efficient in 
reflecting the mutual interests of the immediate parties 
while reducing the administrative costs associated 
with litigation. For example, providers and patients 
could stipulate that in the event of injury due to sub¬ 
standard care, certain scheduled damages would be 
available. The definition of substandard care in this 
case could be left up to binding arbitration which was 
faster and cheaper than jury trials. 

68 Smith v. Department of Insurance, 507 So.2d 1080 (Fla. 1987); Kansas 
Malpractice Victims v. Bell, 757 P.2d 251 (Kan. 1988); Lucas v. United States, 
757 S.W.2d 687 (Tex. 1988); Sofie v. Fibreboard Corp., 771 P. 2d 711 (Wash. 
1989). In Boyd v. Bulala, 647 F.Supp. 781, 786 (W.D. Va. 1986) a federal dis¬ 
trict court held that legislation violated both the federal and Virginia’s guar¬ 
antee of a jury trial, but that state law interpretation was reversed in 
Etheridge v. Medical Center Hospital, 376 S.E. 2d 525 (Va. 1989), and in Boyd 
v. Bulala, 872 F.2d 119 (4th Cir. 1989), regarding the federal constitution. 

87 See generally, Havighurst, “Private Reform of Tort-Law Dogma: 
Market Opportunities and Legal Obstacles,” Law and Contemporary Problems 
49 (1986): 143. 


Of course, there are drawbacks associated with 
contractual arrangements of this sort. The contracts 
themselves could be the subject of a good deal of liti¬ 
gation, decreasing the potential gains in efficiency. 
More important, both state courts and state legisla¬ 
tures have exhibited great concern about the likely 
fairness of the terms of a contract struck between a 
provider and a patient, given the inequalities in bar¬ 
gaining power and knowledge that exist between 
these parties. 68 Thus while contractual alternatives to 
malpractice litigation do represent another option that 
should be explored, they are clearly not a panacea for 
the problem of medical injury. 


Beyond Tort Law 

The reforms we have suggested for tort law might 
go some distance in terms of rationalizing the system. 
However, we are still left with the overwhelming em¬ 
pirical facts that few negligent adverse events now 
lead to claims, and conversely that many claims arise 
out of situations in which there is no evidence of neg¬ 
ligence or even of injury. There are both too many 
unwarranted claims, and too many apppropriate 
claims that are never brought. Any comprehensive 
review of the medical malpractice crisis must at least 
consider what options lie beyond tort litigation. 

The tort reforms discussed in the previous section 
modify the rights and obligations of patients and doc¬ 
tors in malpractice litigation. They do not, however, 
change the basic ground rules—that the patient must 
prove to a jury that he or she was injured due to the 
negligence of a physician or health care provider. 
There are, however, numerous alternatives to tradi¬ 
tional tort litigation, some modest, some major. In this 
section we review several such methods through 
which one might provide compensation to patients in¬ 
jured as a result of their medical care, and also create 
incentives for better care by providers. 

Alternative Dispute Resolution—Given the high 
administrative as well as emotional costs of litigation, 
many have sought alternative dispute resolution for¬ 
mats for medical malpractice claims. The term “alter¬ 
native dispute resolution” is an umbrella concept 
covering a variety of specific procedures designed to 
provide fair outcomes at lower costs. Included in 
ADR are such approaches as arbitration, or media¬ 
tion. 69 In the area of medical malpractice, the most 
prominent vehicle has been the pretreatment agree¬ 
ment through which patients accept binding arbitra- 


68 Havighurst, “Private Reform of Tort-Law Dogma,” 163-4. 

89 See Goldberg, Green, and Sander, Dispute Resolution, (Boston: Little 
Brown and Company, 1985). 


51 




tion in lieu of a jury trial, an agreement that is made 
enforceable by legislation. 70 If a patient is injured, 
and seeks compensation, the determination of liability 
and the amount of damages is made by a neutral arbi¬ 
trator rather than a court. Since the process of arbi¬ 
tration is streamlined, there are comparatively less 
administrative costs than in traditional litigation. 

Courts generally have found this arbitration model 
acceptable. 71 They have, however, carefully scruti¬ 
nized the terms of the initial agreement and the cir¬ 
cumstances of its signing in order to ensure that there 
was a fully informed and voluntary waiver of the pa¬ 
tient’s right to a jury trial. 72 Such judicial scrutiny 
has largely dissipated the possible gains from arbitra¬ 
tion as a more expeditious and economic procedure. 
In turn, this may explain why econometric analyses 
noted above have shown little impact of arbitration 
models on changes in the number of claims or sever¬ 
ity of claims. 73 Thus, while further experimentation 
in dispute resolution procedures might be appropriate 
for the benefit secured in individual cases, binding ar¬ 
bitration does not appear to offer huge potential as an 
alternative to tort litigation. 

Administrative Fault—The administrative fault 
system advocated by the American Medical Associa¬ 
tion is a more serious attempt at ADR, because this 
program relies not on ad hoc agreements and adjudi¬ 
cation, but on a new specialized tribunal that would 
be responsible for resolving all malpractice claims, 
while retaining fault as the basis for liability. 74 Spe¬ 
cifically, the proposal contemplates the establishment 
of a state agency called the “Medical Practices 
Review Board.” The review board would adjudicate 
medical liability disputes, investigate substandard care 
by physicians, undertake disciplinary proceedings, and 
act as a source of information concerning perform¬ 
ance by licensed physicians. 75 

Under this plan, malpractice claims would be re¬ 
moved from the civil justice system and placed before 
this administrative board for determination. 76 Either 


70 As of 1987, 15 states had in place such statutes. See Henderson, “Agree¬ 
ments Changing the Forum for Resolving Malpractice Claims,” Law and 
Contemporary Problems 49 (1986): 243. 

71 Madden v. Kaiser Foundation Hospital, 552 P.2d 1178 (Cal. 1976); Morris 
v. Metriyakool, 344 N.W.2d 736 (Mich. 1984). 

72 See Bedikian, “Medical Malpractice Arbitration Act: Michigan’s Experi¬ 
ence with Arbitration,” American Journal of Law and Medicine 10 (1984): 42. 

73 See pages 48-49. 

74 See Johnson, Phillips, Orentlicker, and Hatlie, “A Fault Based Adminis¬ 
trative Alternative for Resolving Medical Malpractice Claims,” Vanderbilt 
Law Review 42 (1989): 1366. 

75 The board would be composed of seven people, each serving a term of 
five years. At least two, but not more than three, of the members of the 
board would be physicians. One or more would be consumer representatives. 
The board itself would appoint the other key personnel in the agency, includ¬ 
ing attorneys, claims reviewers and investigators. 

76 The claims resolution process would be divided into four stages. First, 
there would be a pre-hearing in which an individual who contended that he 
or she was injured as a result of inadequate health care would initiate the 
claims process by filling out a simple form. The form would be reviewed by 


party could then appeal the Board’s decision to an 
intermediate appellate court in the state. The AMA 
proposal also calls for a number of changes in sub¬ 
stantive medical liability law. 77 In an effort to pro¬ 
vide some quid pro quo for patients and thus survive 
constitutional challenge in the state courts, the AMA 
proposal contemplates broad powers for the Medical 
Practices Review Board in credentialing and disciplin¬ 
ing physicians. 78 

The administrative fault-based proposal is an at¬ 
tempt to develop an integrated approach to both com¬ 
pensation for past medical injuries and deterrence of 
substandard practice in the future. There are, how¬ 
ever, some concerns. First, the proposal does face a 
real constitutional difficulty, because while fault is re¬ 
tained as the basis for liability, the jury is eliminated 
entirely. If state courts are already striking down caps 
on tort damages as offensive to the right of access to 
the courts and juries, they will be very skeptical 
about the validity of the AMA proposal. Next, while 
many have advocated increased efforts by state dis¬ 
ciplinary panels, 79 it is not at all clear that the best 
efforts of such boards will result in significant deter¬ 
rence signals. 80 Probably in partial recognition of 


board personnel and, if it appeared to have merit, would be reviewed by a 
peer expert. If both the claims reviewer and peer expert felt that the claim 
had some merit, an attorney on the board’s staff would represent the injured 
claimant. If the claim was felt to be without merit, the patient could still 
pursue the dismissed claim with a private attorney. 

In the hearing stage, an examiner, acting like an administrative law judge 
in the Social Security system, would preside in a judicial hearing. Prior to 
the hearing, both patient and health care provider would be required to 
submit blind settlement offers. The parties would be subject to sanctions if 
the outcome of the case did not represent a significant improvement over the 
settlement offer rejected at this stage. At the hearing itself, certain eviden¬ 
tiary rules would be in place, but the judge would be able to play an active 
role and could call independent experts if she saw fit. 

The hearing examiner’s decision could be appealed to the Board. A panel 
of three members of the Board, only one of whom could be a physician, 
would hear an appeal. No new factual determinations would be made at this 
stage. For all legal issues, however, the panel would conduct de novo 
review. 

77 The AMA envisions some changes in the standard of care which, while 
not embracing the traditional locality rule, do acknowledge the role that the 
availability or unavailability of specialized equipment and personnel can play 
in treatment decisions. Another important change concerns causation. The 
proposal calls for abandonment of the more probable than not threshold for a 
finding of causation and allows liability if providers’ negligence was a con¬ 
tributing factor. In these cases, damages would be apportioned according to a 
pure comparative negligence standard. With regard to informed consent, the 
AMA would adopt the reasonable patient standard. The proposal also op¬ 
poses lump sum damage claims. In addition, it would cap non-economic dam¬ 
ages by an amount tied to the percentage of the average annual wage in the 
state. Joint and several liability would be eliminated from medical negligence 
claims. A periodic payment schedule would be put into place and the collat¬ 
eral source rule would be overturned. 

78 First, hospitals would be required to review physician performances on 
a regular basis and physicians who are not affiliated with institutions would 
be required to participate in a credentialing process undertaken by the state. 
The board would also maintain a clearing-house for information regarding 
physician discipline and sub-standard care. The board would also have au¬ 
thority to conduct on site review of physicians’ practices. Broad powers for 
disciplining physicians would be lodged with the board. See generally Ameri¬ 
can Medical Association/Specialty Society Medical Liability Project, Model 
Medical Liability and Patient Protection Act (May 1989). 

79 See Wolfe, Bergman, and Silver, Medical Malpractice: The Need for Dis¬ 
ciplinary Reform not Tort Reform (1986). 

80 See Kusserow, Handley and Yessian, “An Overview of State Medical 
Discipline,” JAMA 257 (1987): 820. Recently, several large states including 


52 




these potential drawbacks, the American Medical 
Association has prudently suggested that its plan be 
initiated in a few states on an experimental basis. This 
experimental period would also allow some assess¬ 
ment of the ways in which administrative fault either 
ameliorates or exacerbates the problems with peer 
review at the hospital level. 

Organizational Liability—Another possible alterna¬ 
tive to traditional malpractice litigation is to relieve 
physicians of the direct financial burden of malprac¬ 
tice insurance by shifting the focus of legal liability 
from individual physician to the hospital or health 
care institution connected with the incident. Organiza¬ 
tional liability is consistent with a number of doctrinal 
developments in tort litigation that have expanded the 
“corporate” or “vicarious” liability of hospitals for 
the negligence of non-employee physicians. 81 It also 
reflects some new insurance “channeling” arrange¬ 
ments wherein large hospitals provide their associated 
physicians with coverage under the institutions’ own 
policy. 

These changes in malpractice law and insurance ap¬ 
proaches recognize that the hospital is better able to 
assess its risks and to distribute the burden of its lia¬ 
bility across a broad pool of constituents, and thereby 
obviate the problems faced by individual physicians in 
the high risk sectors in obtaining insurance at reason¬ 
able cost. Even more attractive about this arrange¬ 
ment are the new incentives and opportunities it 
creates for institutional quality assurance. Because 
hospitals are much more likely to have their malprac¬ 
tice premiums set according to their claims experi¬ 
ence, this new focus of liability would considerably 
sharpen the deterrence incentive created by malprac¬ 
tice litigation. The hospital also has the institutional 
perspective and capacity to develop comprehensive 
standards and procedures that promote quality assur- 


Califomia, New York, Massachusetts and Florida have undertaken sweeping 
reforms in their state medical disciplinary apparat While it is too early to 
judge in any final way the efficacy of such reforms, it appears that reviewing 
agencies may have difficulty gaining access to appropriate information re¬ 
garding quality of care. See Keidan. Physician Discipline: Cure for the Medical 
Malpractice Crisis? (unpublished manuscript 1989) (on file with authors). 
These agencies are also especially sensitive to the vagaries of state funding 
and have had difficulty maintaining continuous employment of qualified in¬ 
vestigators and lawyers. Thus, if the state’s commitment to such disciplinary 
panels is not strong, especially in a fiscal sense, deterrence under an adminis¬ 
trative fault plan could be weakened significantly. 

81 See South wick, “Hospital Liability: Two Theories Have Been Merged,” 
Journal of Legal Medicine 4 (1983): 1; and for recent reviews of the cases, see 
Jackson v. Power, 743 P.2d 1376 (Alaska 1987>, Insinga v. Lobelia, 543 So.2d 
209 (Fla. 1989). 


ance and safety, 82 akin to a “systems” approach 83 
that would lessen the individual finger pointing that 
makes medical malpractice so emotionally destructive 
for providers. 

There are, of course, problems with organizational 
liability. First, some would question whether it is 
equitable to make such hospital liability mandatory 
and exclusive. They would argue that legal insula¬ 
tion of the physician from liability would decrease 
deterrence incentives. In addition, there would be a fi¬ 
nancial problem in the legal shift to organizational li¬ 
ability as hospitals and other health care institutions 
were saddled with much larger liability insurance pre¬ 
miums, while physicians would no longer have to pay 
such premiums. Unquestionably, shifts in health care 
reimbursement schedules would have to accompany 
any such move to organizational liability. In addition, 
small hospitals would have to aggregate their risk 
pools with other hospitals in order to function under 
organizational liability. 

Finally, most physicians are not employed by hospi¬ 
tals and typically they have jealously guarded their 
professional autonomy, and their relations with pa¬ 
tients, against control by hospital administrators. On 
the other hand, the fact is that doctors already face 
growing scrutiny from judges and juries in malprac¬ 
tice litigation and recently many state legislatures 
have been directing hospitals to create quality assur¬ 
ance programs that contemplate ongoing review of in¬ 
dividual physicians’ practice decisions and patterns, in 
order to ensure safer and better care for patients. 
Thus, doctors are increasingly subject to the kind of 
supervision contemplated by organizational liability, 
without having the benefit of any relief for the costs 
of malpractice insurance. 

Ironically, this expansion of quality assurance ac¬ 
tivities in an effort to reduce the need for and inci¬ 
dence of malpractice litigation by patients has in turn 
precipitated yet another bout of litigation, this time by 
affected doctors. The ultimate source of the medical 
staffs ability to secure and enforce a higher quality of 
care in the hospital is the peer review committees’ 
power to suspend or revoke the credentials of those 
incumbent doctors who have provided sub-standard 


82 As mentioned previously, changes in liability standards have increased 
incentives for physicians to develop appropriate practice standards. For ex¬ 
ample, in a major risk management effort, the Department of Anesthesia at 
Harvard Medical School devised specific detailed and mandatory standards 
for minimal patient monitoring during anesthesia. Such standards had not ex¬ 
isted previously but were accepted by practitioners. See Eichhom, Cooper 
and Cullen, “Standards for Patient Monitoring During Anesthesia at Harvard 
Medical School,” JAMA 256 (1986): 1017-1020. These practice standards ap¬ 
peared to have lowered malpractice claims against anesthesiologists at partici¬ 
pating institutions and efforts are now underway to develop similar standards 
for obstetricians at Harv ard Medical School. 

83 Berwick, “Continuous Improvement,” 53. 


53 





care in the hospital, and to deny hospital staff privi¬ 
leges to applicants who have shown evidence of poor 
quality elsewhere. Such decisions to suspend or deny 
practice credentials can be quite controversial, and 
lead to litigation on a variety of fronts. 

First, physicians who have suffered suspension of 
credentials may claim that their due process rights 
were not respected, especially in cases involving 
public hospitals. 84 Alternatively, physicians may seek 
rights of cross examination and other trappings of ad¬ 
judicative process. 85 More importantly, physicians 
who lose their practice privileges may allege antitrust 
violations: the aggrieved physician will claim that the 
decision to suspend privileges was not motivated by 
concerns about quality of care, but rather was an at¬ 
tempt to curb competition in the specialty area. 86 
Indeed peer review activities are now drawing con¬ 
siderable antitrust scrutiny, a trend that will likely 
accelerate in light of a recent Supreme Court deci¬ 
sion. 87 Yet another concern of physicians who serve 
on peer review committees is the threat of involve¬ 
ment in malpractice litigation. Since these committees 
often pass judgment on specific incidents involving 
physicians on the medical staff, their activities are of 
special interest to plaintiffs’ attorneys who would like 
access to peer review committee documents. While 
most states provide explicit immunity for peer review 
activities, some state courts have managed to find ex¬ 
ceptions to these statutes in order to allow discovery 
of the peer review data. 88 Such judicial decisions 


84 See Richardson v. St. Johns Mercy Hospital, 674 S.W.2d 200 
(Mo.App.1984). 

85 See Rao v. St Elizabeth's Hospital, 488 N.E.2d 685 (Ill.App. 5 Dist. 
1986). 

86 It seems likely that there will be more antitrust litigation in the future. 
Since 1975, with the decision of Goldfarb v. Virginia State Bar, 421 U.S. 773 
(1975), the Supreme Court has indicated that the practice of the learned pro¬ 
fessions will be considered commerce, and thus subject to the scrutiny of the 
antitrust laws. The initial Supreme Court cases regarding health care antitrust 
concerned efforts to remove anticompetitive rules which had been put in 
place by insurers and providers. See Union Labor Life Insurance Company v. 
Pireno, 458 U.S. 119 (1981); Arizona v. Maricopa County Medical Society, 457 
U.S. 332 (1981). Soon however, aggrieved individuals began to request anti¬ 
trust scrutiny regarding the behavior of individual hospitals or physicians. 
See Jefferson Parish Hospital District #2 v. Hyde, 466 U.S. 2 (1984); Weiss v. 
York Hospital, 745 F.2d 786 (3rd Cir. 1984). 

87 See Patrick v. Burget, 108 S.Ct. 1658 (1988). With the decision of Patrick 
v. Burget, the Supreme Court indicated that the state action doctrine would 
not immunize state-required peer review activities by private hospital staffs 
from antitrust litigation unless states provided official review of such private 
decisions. Although the Health Care Quality Improvement Act of 1986 was 
intended to limit antitrust litigation regarding peer review, many observers 
doubt that it will have this effect. See e.g. Colantonio, “The Health Care 
Quality Improvement Act of 1986 and its Impact on Hospital Law,” West 
Virginia Law Review 91 (1988): 91; Blumstein and Sloan, “Antitrust in Hospi¬ 
tal Peer Review,” Law and Contemporary Problems 51 (1988): 7. Thus we can 
expect continued antitrust scrutiny of peer review activities. See Bolt v. Hali¬ 
fax Hospital Medical Center, 851 F.2d 1273 (11th Circuit), vacated and peti¬ 
tion for rehearing en banc granted, 861 F.2d 1233 (11th Cir. 1988), reinstated 
in part and vacated in part en banc, 874 F.2d 755 (11th Cir. 1989). Lawyers 
have had some doubts about bringing antitrust suits in this area, and since the 
major Supreme Court decision is so recent, it is difficult to predict the 
amount of litigation that will occur in the future. Nonetheless, the Patrick de¬ 
cision can only serve as a litigation incentive. 

88 See Kalish v. Mt. Sinai Hospital, 270 N.W. 2d 783 (Minn. 1978). 


appear to be influenced by the facts of the individual 
case, rather than the specific structure of the state im¬ 
munity laws. 89 Concerns about the confidentiality of 
peer review will likely continue to be an area of 
active litigation in the 1990s, especially as more states 
pass laws encouraging organizational peer review and 
quality assurance activities, and require that some of 
this data be turned over to the state for regulatory 
purposes. 90 

These various types of litigation create serious con¬ 
cerns on the part of physicians involved in peer 
review. Even those physicians who recognize that the 
best long-term response to malpractice litigation is 
better quality medical practice, and that a physician’s 
peers are better judges of medical care than lawyers 
or juries, are hesitant to become involved in peer 
review activities that may lead to litigation. While this 
is and will continue to be a significant problem even 
in the present system of tort litigation, it would 
become even more prominent if one moved to general 
organizational liability of hospitals. Thus, any compre¬ 
hensive effort to address medical malpractice litiga¬ 
tion must also address the legal problems raised by 
peer review activities. 

No-Fault Patient Compensation—The drawbacks of 
both traditional tort litigation and of those alternatives 
that still rely on determinations of fault have led a 
number of people to advocate “no fault” approaches 
to medical injury compensation. As far back as the 
early 1970s, a number of scholars were proposing par¬ 
tial or complete no-fault systems. 91 The partial no 
fault approaches center on accelerated compensation 
for designated injuries that are quite likely to be 
avoidable. 92 These particular injuries would be ex¬ 
tracted from the tort regime and be compensated 
administratively. Medical adversity insurance differs 
from pure no-fault or social insurance in that the pro¬ 
viders of care remain responsible for paying for the 
listed outcomes—a form of “strict liability” through 
provider-purchased, experience-rated casualty insur¬ 
ance. More recently, proponents have been able to 
draw on the experience of New Zealand 93 and 


89 Compare Coburn v. Seda, 677 P.2d 173 (1984), with Chandra v. Sprin¬ 
kle, 678 S.W.2d 804 (Mo. 1984). 

90 See e.g. Beth Israel Hospital Association v. The Board of Registration in 
Medicine, 515 N.E.2d 574 (Mass. 1987). 

91 See Havighurst and Tancredi, “Medical Adversity Insurance, a No- 
Fault to Medical Malpractice and Quality Assurance,” Insurance Law Journal 
613 (1974): 69; O’Connell, “No-Fault Insurance for Injuries Arising from 
Medical Treatment: A Proposal for Elective Coverage,” Emory Law Journal 
24 (1975): 21. 

92 See Tancredi, “Designing a No-Fault Alternative,” Law and Contempo¬ 
rary Problems 49 (1986): 277; American Bar Association, Designated Compen¬ 
sable Event System: A Feasibility Study (1979). The latest iteration of the 
concept is the ACE (accelerated compensable event). 

93 See Gellhorn, “Medical Malpractice Litigation (U.S.)—Medical Mishap 
Compensation (N.Z.),” Cornell Law Review 73 (1988): 170. 


54 




Sweden 94 to answer the critics of no-fault and to de¬ 
velop realistic approaches to an administrative com¬ 
pensation system. 95 In both Britain and Canada, there 
is sentiment for use of a no-fault model. 96 In this 
country, the states of Virginia and Florid? have put 
into effect no-fault compensation plans for neonatal 
neurological injury. 97 

How does a no-fault system work for compensation 
of medical injury? In Sweden, a combine of insurance 
companies provides a no-fault insurance program. 98 
Complementing, yet separate from, the insurance 
compensation plan is the Medical Responsibility 
Board (MRB) that hears complaints about quality of 
care rendered to individuals. 99 The advantage of un¬ 
coupling the compensation and deterrent approaches 
to medical injuries as the Swedes have done is that it 
frees both functions from the adversarial notions of 
tort litigation, providing greater and more equitable 
compensation and stronger deterrence signals. 100 

Nonetheless, there are significant problems with the 
no-fault approach. Many have argued that our major 
present-day use of no-fault within workers’ compensa¬ 
tion has failed to provide appropriate compensation 
for individuals suffering from occupational dis¬ 
eases. 101 Still others fear that a no-fault approach 


94 See Rosenthal. Dealing With Medical Malpractice: The British and Swed¬ 
ish Experience. (1988) 131-206. 

95 See Halley, Fowks. Bigler. Ryan. Medical Malpractice Solutions: Systems 
and Proposals for Injury Compensation (Springfield. Ill., Charles Thomas 
1989). 

96 See British Medical Association. No-Fault Compensation Working Party 
Report (1987); R. Prichard. Medical Malpractice (1989). 

97 See White, "Innovative No-Fault Tort Reform for an Endangered Spe¬ 
cialty',” Virginia Law Review■ 74 (1988): 1487. Some have criticized the 
Virginia system for only controlling eases of people who would probably re¬ 
cover in the tort system, thereby resulting in less compensation for them and 
no more compensation for others. See Gallup. "Can No-Fault Compensation 
of Impaired Infan ts Alleviate the Malpractice Crisis in Obstetrics?” Journal of 
Health Politics. Policy and Law. 14 (1989): 69. 

98 A patient seeking compensation for medical injury must merely show 
that her injuries are of a designated type and compensation is available. 
There need be no allegation of negligence, and thus physicians often assist 
their patients in the effort to secure compensation. See Oldertz. "The Swed¬ 
ish Patient Insurance Scheme—Eight Years of Experience,” Medical Legal 
Journal 52 (1984): 43. 

99 Most such complaints are brought by patients but physicians are encour¬ 
aged to self-report to their department heads who in return report to the 
MRB. The MRB can discipline physicians who provide poor quality care or 
can decide that no action is necessary. The MRB has both expen input and 
political and citizen representatives, similar to the boards envisioned by the 
AMA’s fault-based system. 

100 Patient compensation is more straightforward in the absence of 
the corrective justice aspects of ton litigation. Physicians can actually assist 
patients in their efforts to receive compensation. On the other hand, since 
compensation is not directly sought from the physician or his insurer, data 
regarding sub-standard care is more freely available. Quality assurance efforts 
proceed smoothly, free from concerns about investigations by plaintiffs attor¬ 
neys regarding the quality assurance data. Thus, at least in theory, a no-fault 
system would provide greater compensation and clearer deterrent signals. 

101 See Barth and Hunt. Workers Compensation and Work-Related Illnesses 
and Diseases (1980): see also Kutchins. "The Most Exclusive Remedy is No 
Remedv At AD: Workers Compensation Coverage for Occupational Dis¬ 
eases." Labor Law Journal 32 (1981): 219-20. Indeed, one might conjecture 
tha t deter minin g causation in medical injury cases may be much more diffi¬ 
cult than dete rminin g causation in workers’ compensation cases in that most 
patients will have a significant background of disease from which the medical 
care-induced injury must be disentangled. Thus no-fault approaches to medi¬ 
cal injuries will likely have inherently higher administrative costs than 
workers’ compensation. 


would do away with the deterrent effect of medical 
malpractice litigation. This contention, however, 
overlooks the fact that no-fault is still a mode of legal 
liability with one party required to compensate the 
victims of its activities, and the requisite insurance 
would likely be provided at the level of hospital or 
other health care organization where premiums could 
be strongly experience rated. 102 

Recently, we have completed a study of medical 
injury, and the costs arising out of such injury, in the 
state of New York. The data from this study indicate 
that in New York, at least, one can provide full com¬ 
pensation for the net financial losses of all seriously 
injured patients for roughly the same amount ex¬ 
pended on litigation for only a selected number of 
those negligently injured. 103 

Social Insurance—The relationship between provid¬ 
ing health insurance for all Americans and tort reform 
must be underlined, because comprehensive health 
benefits would deal directly with many of the patient 
losses for which malpractice litigation now seeks re¬ 
dress. One major advantage of the Swedish and New 
Zealand systems for no-fault insurance for medical 
injury is that these compensation systems are nestled 
within a much more encompassing safety net of social 
welfare programs. For instance, in Sweden, there is a 
national health system that provides medical care for 
all individuals and comprehensive disability insurance 
for lost earnings. Thus their no-fault system does not 
absorb much of the costs arising out of an iatrogenic 
injury, and the smaller stake in the outcome reduces 
the intensity of conflict in individual cases. 

Broader disability insurance and sick leave benefits 
would also decrease the overall costs associated with 
compensation programs for iatrogenic injury. When a 
collateral source offset is in place, any increase in the 
coverage of first party loss insurance correspondingly 
reduces the losses left to be handled by the much 
more expensive system of third party malprac¬ 
tice insurance. 

Beyond Health Care Providers—Malpractice litiga¬ 
tion is not the only aspect of tort law that plays a 
major role in the health care area. Just as prominent 
and often just as troubling are product liability suits 
against manufacturers of vaccines, prescription drugs 
and other medical appliances. Indeed, many of these 
cases are the result of the combined action of a manu- 


102 The best work on workers’ compensation and deterrence suggests that 
workers’ compensation has a considerable preventive effect on workplace fa¬ 
talities. See Vlscusi and Moore, Compensation Mechanisms for Job Risks 
Wages, Workers' Compensation and Product Liability (forthcoming. Princeton 
University Press). 

108 See Harv ard Medical Practice Study, Patients. Doctors, and Lawyers 
(1990), chap. 8. 


55 






facturer which designs and markets the drug and a 
physician—the learned intermediary—who prescribes 
the drug for a patient. 104 Thus, any effort to cut back 
sharply on the tort liability of the doctor is likely to 
redirect the pressure by the victim for tort relief to¬ 
wards the manufacturer (as has recently been evident 
in the rise of third party product suits by employees 
covered by no-fault workers’ compensation). Because 
drug manufacturers do operate within a national 
market, the federal government must be especially 
sensitive to the possible impact of measures directed 
at doctors and patients alone. 105 This is not to imply 
that there is no legitimate federal responsibility for 
malpractice law itself. As the largest third party pur¬ 
chaser of health care, the federal government must be 
concerned about the impact of tort litigation on the 
costs and quality of that care. In addition, the federal 
government must be sensitive to the way its own 
legal policies (e.g., antitrust) interact with and occa¬ 
sionally obstruct the efforts by individual states to im¬ 
prove the situation. 106 


104 See Shulman, “The Broader Message of Acutane,” American Journal of 
Public Health 79 (1989): 1565-1570. For a recent, revealing illustration of this 
phenomenon, see O’Gilvie v. International Playtex, Inc., 821 F. 2d. 1438 (10th 
Cir. 1987), where a doctor’s misdiagnosis of toxic shock syndrome 
precipitated an $11.5 million jury verdict against the product manufacturer, 
including $10 million in punitive damages. 

105 In Sweden, the institution of a no-fault insurance approach to medical 
injury was wedded to a no-fault program for compensation for drug related 
injuries, a program which is underwritten by drug companies. See Rosenthal, 
Dealing With Medical Malpractice: The British and Swedish Experience. In this 
country, a no-fault system for vaccine related injury has recently been insti- 
‘uted by the United States Congress. Vaccines represent one of the two ex- 
;eptions to the learned intermediary rule and thus vaccine manufacturers 
must provide patients with a warning concerning the risks associated with 
vaccination. See Reyes v. Wyeth Laboratories, 498 F.2d 1264 (5th Cir. 1973), 
cert, denied, 419 U.S. 1096 (1974). At least partially as a result of this re¬ 
quirement regarding warning, vaccine manufacturers have faced a great deal 
of product liability litigation arising out of parties injured by vaccines. See 
Institute of Medicine, Vaccine Supply and Innovation (1985). 

In response, Congress passed an amendment to Title III of the Omnibus 
Health Legislation which was known as the National Childhood Vaccine 
Injury Act. See S.1744, 99th Cong., 2d sess. (1986). The Act creates a man¬ 
datory no-fault compensation scheme for individuals injured by childhood 
vaccines. An injured party may either accept compensation awarded through 
the no-fault proceeding or bring a separate civil suit, but in the latter circum¬ 
stance, theories of liabilities are significantly limited. Under the no-fault 
scheme, burden of proofs are lower, as is the potential compensation. A trust 
fund, consisting of an excise tax on dosages of childhood vaccine, provides 
compensation. See Budget Reconciliation Act of 1987, P.L. 100-203, sec. 
4301-07. 

Of course, childhood vaccines may be a special case. They are a necessary 
public health tool but not an area of great profit making by drug companies. 
Therefore, the industry’s threats to absent itself from the marketplace in this 
particularly important area are likely to bring about Congressional interven¬ 
tion. Other types of drugs might have less of a claim on Congressional atten¬ 
tion. Nonetheless, the Vaccine Act demonstrates that tort reform could 
extend itself to drugs and other products. We await some further maturation 
of this program so as to evaluate how well it functions. 

106 Consider the following example. New York State’s Malpractice 
Reform Bill of 1986 required hospitals to purchase excess coverage for physi¬ 
cians practicing on the staffs of the hospitals. Thus the hospitals had to bear 
new costs. They passed these costs along to Blue Cross/Blue Shield, com¬ 
mercial insurers, and to the state Medicaid program. However, federal Medi- 


CONCLUSION 

We have reviewed a broad array of issues posed by 
malpractice litigation for the health care system. In 
the mid-70’s and in the mid-80’s, providers in many 
regions of the country felt grave concern about spiral¬ 
ling liability costs. Although much of the hue and cry 
has died down now that premium levels have 
plateaued, the empirical research we reviewed earlier 
shows there is ample room for another upsurge in the 
90’s in malpractice claims and premiums. 

In the interim, a host of policy changes have been 
proposed and adopted within each of the health care, 
legal, and insurance systems whose interplay gener¬ 
ates the observed rates of patient injuries, tort claims, 
and premium costs. We were asked to provide here a 
review of the arguments for and against these various 
ideas, not to spell out and to defend our own favored 
proposals. As we have tried to indicate, though, there 
are no easy solutions to this complex set of problems: 
indeed, apparently desirable changes in one area of 
the law (e.g., antitrust) may run counter to equally 
appealing initiatives taken elsewhere (e.g., quality as¬ 
surance through peer review). Too often conventional 
tort reform has reflected a rather narrow view not 
just of the actual source of the problems posed by 
malpractice litigation for doctors, but also of the need 
for some such liability mechanism to insure safe care 
for patients. Recently, some systematic empirical and 
analytical work has begun to emerge about more fun¬ 
damental possibilities—e.g., the AMA’s administrative 
fault proposal and the New York state study of the 
incidence, compensation, and prevention of patient in¬ 
juries. At this point of time, then, it would be prema¬ 
ture to endorse specific proposals for statutory 
change, especially for enactment at the national level. 
What is needed, instead, is careful analysis of the 
growing body of data now available, and the design, 
implementation, and evaluation of demonstration 
projects. We would hope that this Commission, 
whose primary focus is the availability and affordabil¬ 
ity of medical care, would recommend that a similarly 
systematic inquiry be mounted about the ways in 
which malpractice litigation or its alternatives can 
best enhance the quality of the medical care thereby 
provided. 


care disallowed any reimbursement for these purposes, and the issue is still in 
litigation. This demonstrates how the prominent federal role in the provision 
of medical care creates federal interest in tort reform. 


56 




DESIGN OF HEALTH PLAN BENEFITS FOR THE 

NONELDERLY 


Janet Lundy * 


As you requested, this paper provides background 
information on health plan benefits and a discussion of 
a standard, or “basic,” health benefit plan. Also in¬ 
cluded is a discussion of how health plan benefits are 
designed to meet certain requirements, such as the 
need to cover certain population groups (e.g., the low 
income) or to conform to certain cost constraints. In 
addition, the paper presents and discusses several 
health benefit plan options. 

The focus of this paper is on fee-for-service plan 
benefits, which is the most prevalent type of coverage 
in this country, as opposed to the benefit structure of 
health maintenance organizations. In addition, the dis¬ 
cussion focuses only on health benefits for the 
nonelderly (under age 65) population. 

The specification of the five health benefit plan op¬ 
tions was determined in discussions with you. We 
agreed that we would use three plans already devel¬ 
oped by the Congressional Research Service (CRS) as 
illustrative plans for our project on health insurance 
for the uninsured: a “typical” private employer-based 
plan, a “tailored” plan designed for the low-income, 
and a “catastrophic” plan for medical expenses that 
are large compared to family income. In addition, you 
requested that we develop (1) a typical plan that in¬ 
cludes preventive services and (2) a reduced typical 
plan which includes greater enrollee cost sharing and 
excludes mental health and dental services, but in¬ 
cludes preventive services. The relatively lengthy dis¬ 
cussion of preventive services responds to your 
request for information on these frequently uncovered 
services. 


* Report prepared by Janet Lundy, Specialist in Social Legislation, Educa¬ 
tion and Public Welfare Division, Congressional Research Service, October 
24, 1989. 


WHAT ARE THE BENEFIT DESIGN 
FEATURES OF FEE-FOR-SERVICE 
HEALTH PLANS? 

The design of a health plan’s benefits includes sev¬ 
eral features that define the benefits and help to de¬ 
termine what the benefits will cost. These benefit 
features include (1) covered services, (2) limits on 
allowable charges, (3) limits on services covered or 
total payments, (4) enrollee cost sharing and cata¬ 
strophic protection, and (5) cost containment features. 
Only the first feature, covered services, pertains to 
the types of health care services covered by a plan; 
the other features define how the costs of health care 
services are divided between the plan and the plan 
enrollees. 


Covered and Excluded Health 
Care Services 

The major types of health care services that health 
plans cover include hospital services (inpatient and 
outpatient), surgical services (inpatient and outpa¬ 
tient), physician services, X-ray and laboratory tests, 
emergency care, prescription drugs, and mental health 
care, including substance abuse (inpatient and outpa¬ 
tient). Most employer health plans cover these bene¬ 
fits. What varies more from plan to plan than the 
types of services covered are the reimbursement 
levels for each service and the plan’s cost containment 
features. 

Other services sometimes covered in health plans 
include dental care, vision care, well-baby and child 
care, preventive care including routine physical ex¬ 
aminations, home health services, and care in an ex¬ 
tended care facility. 

Any costs enrollees incur for services not covered 
by a health plan (“excluded” services) are neither 
paid for by the plan nor applied toward the plan’s de¬ 
ductible requirements or catastrophic limits (described 
below). Examples of services and expenses that are 


57 



not covered under many health insurance plans are 
cosmetic surgery; infertility services; services not 
deemed “medically necessary” such as those done for 
educational, research, or vocational training purposes; 
experimental treatments; tests or treatments not 
needed for a particular condition; and services that do 
not meet generally accepted standards of medical 
practice. Plans may also specify the type of providers 
to whom payment can be made for covered services 
and may exclude treatment by others. For example, a 
plan may pay for mental health services only if pro¬ 
vided by a psychiatrist or psychologist. 


Limits on Allowable Charges 

Most health plans use some method for determining 
the extent to which a medical expense is eligible for 
payment. These methods are designed to exert some 
control over plan costs by setting limits on the 
amount of a health care provider’s charges or costs 
that will be reimbursed. For example, in general, inpa¬ 
tient hospital bills are paid by Medicare under a pro¬ 
spective payment system, by commercial insurers as a 
percentage of the hospital’s average charge for a 
semiprivate hospital room, or by Blue Cross and Blue 
Shield according to contract limits negotiated by the 
hospital and the Blue plan. 

A plan may pay physicians according to a method 
known as “reasonable and customary” (R&C). Under 
R&C, payment is made according to the physician’s 
actual charge for a particular service, limited by a 
maximum determined as a percentage of the average 
charge for that service by physicians in the same geo¬ 
graphic area. Plans may also pay according to a fee 
schedule, where the plan establishes maximum pay¬ 
ment amounts in each geographic area for each serv¬ 
ice. Blue Cross and Blue Shield plans generally limit 
payment to physicians by negotiating contracts under 
which the physician agrees to accept the Blue plan’s 
payment as full payment for covered services. 

Limits on Services Covered or 
Total Payments 

Health plans frequently set limits on the units of 
service (e.g., visits or days of care) covered by the 
plan, or on the maximum dollar amount paid by the 
plan per service, per year, or over the insured per¬ 
son’s lifetime. For example, a plan’s mental health 
coverage may limit payment for inpatient mental 
health care to 30 days per year and limit outpatient 
mental health care to a maximum number of visits per 


year (perhaps 50), with an annual maximum payment 
of $1,000 per year. 

Enrollee Cost Sharing and 
Catastrophic Protection 

In recent years, health plans have extended their 
use of enrollee cost sharing, including deductibles and 
coinsurance, in an attempt to reduce plan costs. A de¬ 
ductible is a specific dollar amount, commonly $100 to 
$200, that must be paid by the insured before the 
health plan will begin paying benefits. Typically, em¬ 
ployer plans require the insured to pay a yearly over¬ 
all plan deductible (also called a “major medical” 
deductible) prior to plan payment for covered serv¬ 
ices. Coinsurance is a specified percentage of each bill 
for a covered medical services that the insured must 
pay, commonly 20 percent. The coinsurance is ap¬ 
plied to the remaining covered expenses after any de¬ 
ductible has been met by the insured. 

Many plans include as a benefit a yearly limit (also 
known as a catastrophic, out-of-pocket, or stop-loss 
limit) on the amount of cost sharing (coinsurance and 
sometimes deductibles) that the insured must pay from 
their own pockets. After that limit (commonly $1,000 
to $3,000) is reached, the plan pays 100 percent of any 
additional expenses for services covered by the plan. 

Arguments exist both for and against the use of en¬ 
rollee cost sharing. Clearly, cost sharing reduces 
health plan costs because the health plan pays a 
smaller proportion of the cost of covered health care 
services. Proponents for cost sharing maintain that re¬ 
quiring enrollees to contribute to the payment of their 
medical expenses makes them more sensitive to their 
utilization of medical care, potentially reducing utili¬ 
zation and, thus, health plan costs. 

Opponents of the use of enrollee cost sharing argue 
that it does not reduce utilization since it is physi¬ 
cians, not the patients paying the cost-sharing 
amounts, who make most decisions about the use of 
health care services. In addition, it is argued that any 
reductions in utilization because of cost-sharing re¬ 
quirements are not necessarily desirable, since people 
may be discouraged from seeking needed medical 
care. 

Studies such as the Rand Health Insurance Experi¬ 
ment (HIE) have found that enrollee cost sharing can 
lead to lower utilization and lower health plan costs. 
The HIE found that per capita expenses for enrollees 
in a plan with a 95 percent coinsurance rate (i.e., the 
percentage paid by the insured) for outpatient services 


58 


were 28 percent lower than expenses for those in a 
plan with no enrollee cost-sharing requirements. 1 

Enrollee cost sharing is sometimes defmed to also 
include the enrollee’s share of the premium payment. 
For typical large and medium private sector employer 
plans, the employer generally pays the full premium 
for employee-only coverage, but requires the enrollee 
to pay about 25 percent of the premium for family 
coverage. 


Cost Containment Features 

In addition to enrollee cost-sharing requirements, 
other features are included in health plans to attempt 
to control plan costs. These include alternative financ¬ 
ing arrangements such as self insurance; premium cost 
sharing between plan sponsor and enrollee; financial 
incentives to use services less costly than hospital 
care, such as home health care, hospice service, 
urgent care centers, etc.; managed care techniques, 
such as hospital utilization review and second surgical 
opinion requirements, and health promotion programs 
such as smoking cessation, substance abuse, weight re¬ 
duction, and stress management. Another technique 
for controlling plan costs is to use preexisting condi¬ 
tion clauses, which temporarily or permanently ex¬ 
clude from coverage an enrollee’s medical condition 
that existed prior to coverage by the health plan. 


WHO DOES NOT HAVE HEALTH 
CARE COVERAGE? 

An estimated 36.8 million nonaged Americans (17.5 
percent of persons under age 65) lack health insurance 
coverage. Persons who do not privately obtain health 
insurance, either through their jobs or by purchasing 
insurance, sometimes receive coverage from Govern¬ 
ment programs such as Medicaid. However, coverage 
from Government programs is contingent on meeting 
certain program eligibility requirements. Those who 
do not have private coverage and either do not meet 
the eligibility requirements of Government programs 
or choose not to participate in them are the 36.8 mil¬ 
lion (17.5 percent) who are uninsured. 2 The charac¬ 
teristics of the uninsured are described below. 


1 Willard G. M annin g, et al., “Health Insurance and the Demand for Medi¬ 
cal Care: Evidence from a Randomized Experiment,” American Economic 

Review (June 1987): 251-277. . 

2 The statistics on the uninsured are based on a Congressional Research 
Service analysis of the March 1987 Current Population Survey (CPS), a 
household survey conducted by the Census Bureau. The March 1987 CPS 
collected information on health insurance coverage for 1986. A more detailed 
description of these statistics can be found in: U.S. Congress, House Commit¬ 
tees on Education and Labor, Energy and Commerce, and Senate Special 
Committee on Aging, Cost and Effects of Extending Health Insurance Cover¬ 
age . 100th Cong., 2d Sess., October 1988. 


Age 

The uninsured are young: 32 percent are under age 
18; 22 percent are age 18-24; and 19 percent are age 
25-34. 


Employment 

More than half (52 percent) of the uninsured are 
employed; most of the working uninsured (59 percent) 
are in small firms of less than 100. Workers whose 
jobs did not provide health insurance tended to be 
part-time rather than full-time workers, young rather 
than older workers, lower-paid rather than higher- 
paid workers, in small firms rather than in large firms. 
These workers also tended to be employed in the 
service-producing and retail sectors of the economy. 
Between two-thirds and four-fifths of the uninsured 
live in families where someone is employed. 


Income 

Over half (61 percent) of the uninsured are low 
income (family income under $20,000). About 30 per¬ 
cent of uninsured persons live in families with in¬ 
comes below the Federal poverty threshold for their 
family size. 


ISSUES IN DESIGNING A HEALTH 
BENEFITS PLAN 

General 

A health plan’s benefits are designed to pay either 
all or a portion of the health care expenses of the 
population covered by the health plan. This is pre¬ 
sumably the purpose of insurance—to ensure that the 
health care services used by the covered population 
are paid for, that unexpected health care expenses can 
be paid for, and that financial means do not become a 
barrier to seeking or receiving health care services. 

Several questions need to be asked when designing 
a health benefits plan. These include: 

—What benefits will be included? What is a “basic” 
health benefits plan? How should the population 
to be covered help determine a plan’s benefits? 

—What are some health benefit plan options? 

—W’hat is the cost of the plan? 


59 


28-861 - 90 - 3 : QL 3 



—What is the framework for the health plan 
benefits? 

These issues will be discussed below. 


What Benefits Will Be Included? 

In general, the goal of a health benefits plan is to 
provide payment for health care services needed or 
used by the covered population. Health care benefits 
“needed” by a given population can be defined either 
in terms of (1) the types of services used by the popu¬ 
lation to be covered by the health plan (for example, 
hospital services, outpatient prescription drug serv¬ 
ices, etc.), or (2) the financial means of the covered 
population to pay for health services. In designing a 
health benefits plan, one may wish to consider what is 
a “basic” health care benefits package. 

1. “Basic” Health Care Benefits—There is no clear 
definition of what comprises a “basic” package of 
health care benefits. In insurance terminology, most 
health insurance plans have been categorized as either 
“basic plus supplemental major medical” or “compre¬ 
hensive major medical.” This distinction has become 
more confusing than helpful over the years. However, 
it is useful to define these terms since they often arise 
in the description of health insurance plans. “Basic” 
coverage originally meant coverage of certain ex¬ 
penses that were fully paid for by the insurer without 
any coinsurance or deductible (also known as “first- 
dollar coverage”). The most common type of early 
basic coverage (in the 1920’s and 1930’s) was for hos¬ 
pital services and physician services provided in a 
hospital setting. 

“Major medical” insurance was later designed to 
cover expenses, such as physician office visits and 
prescription drugs, that were not covered as “basic” 
expenses. Major medical coverage is generally charac¬ 
terized by the enrollee payment of a deductible and 
coinsurance, a high ceiling on the total amount pay¬ 
able by the plan, and a limit on cost-sharing expendi¬ 
tures by enrollees (also called an out-of-pocket or 
“catastrophic limit”). Since basic and major medical 
insurance plans were usually combined as one pack¬ 
age, although often offered by two different insurers, 
the package became known as “basic plus supplemen¬ 
tal major medical.” 

“Comprehensive major medical” insurance origi¬ 
nally subjected all covered expenses, including hos¬ 
pital-related expenses, to a common deductible and 
coinsurance. A typical design would be for the en¬ 
rollee to pay 20 percent of all covered expenses after 
paying a $100 deductible. 


Insurance plans have changed over time so that 
deductibles and coinsurance have been added to the 
basic coverage of many plans, and hospital and sur¬ 
gery are now covered in full by many comprehensive 
plans. Therefore, while the terms are still used, there 
is frequently little distinction between them. It is easi¬ 
est to focus on individual plan features to understand 
the nature of a plan’s coverage. This document uses 
the terms “overall plan deductible” and “overall plan 
coinsurance” to refer to the major medical features of 
health plans. 

In non-insurance parlance, “basic” health care serv¬ 
ices, and any health plan benefits that pay for such 
services, usually refer to some determination of the 
minimum health services that should be generally and 
uniformly available in order to assure adequate health 
status and protection of the population from disease, 
or to meet some other criteria or standard. However, 
there is little agreement on what constitutes a “basic” 
health benefits plan. 

Since a single definition of a “basic” benefits pack¬ 
age does not exist, it may be helpful to use as a stand¬ 
ard a common or typical health benefits package. 
Most Americans with health plan coverage (approxi¬ 
mately 75 percent) are covered by employment-based 
health plans. While these plans vary considerably, it is 
possible to develop a hypothetical or composite plan 
that is typical of the most prevalent benefit provisions 
found in health plans offered by medium and large 
firms. The following is a typical 1988 private sector 
employment-based plan: 3 

The typical private employment-based plan de¬ 
scribed above provides coverage for most health care 
services (hospital, surgical, physician, X-ray and lab¬ 
oratory, emergency, prescription drugs, mental health, 
and dental). The $100/$300 overall deductible (the 
amount the enrollee must pay out-of-pocket before 
the plan begins paying benefits) applies to all services 
except hospital and emergency. The enrollee out-of- 
pocket costs applied to the annual $l,000/$2,000 
out-of-pocket (or, “catastrophic”) limit include coin¬ 
surance amounts, but not the overall deductible. 
There is no limit on the maximum amount the plan 
will pay over the enrollee’s lifetime. The coinsurance 
percentages are percents of reasonable and customary 
limits for covered services paid by the plan, except 
for the hospital room and board coinsurance, which is 


3 This “typical” employment-related health plan was developed by the 
Congressional Research Service and the Hay/Huggins Company (while 
under contract with CRS), based on data in the 1988 Hay/Huggins Benefit 
Report, a sample of nearly 900 medium to large employers included in the 
annual Hay/Huggins Benefits Survey. This data base covers approximately 
25 million people who receive health insurance benefits through these em¬ 
ployers. See U.S. Congress, House Committee on Post Office and Civil Serv¬ 
ice, The Federal Employees Health Benefits Program: Possible Strategies for 
Reform, 101st Cong., 1st Sess., May 24, 1989, 138-140. 


60 



paid as a percentage of the hospital’s semiprivate 
room rate. Thus, the maximum amount that the en- 
rollee would pay for services covered by this plan 
would be $1,100 for an individual plan and $2,300 for 
a family plan, assuming that provider charges were 
not in excess of the plan’s reasonable and customary 
limits. 


Typical Private Sector Employment-Based 
Health Plan, 1988 


Benefit 

Plan provision 

Overall deductible (per person/family; for all 

$100/$300 

benefits except hospital and emergency 


services). 


Annual out-of-pocket limit (per person/ 

$1,000/$2,000 

family; counts only nonmental health coinsur- 


ance toward limit). 


Lifetime maximum. 

None 

Hospital services: 


Room and board, 365-day per stay maximum.. 

100% 

Other hospital expenses. 

100% 

Hospital alternatives (extended or home 

Yes 

health care). 


Surgical services. 

80% 

Physician services. 

80% 

X-rays and laboratory. 

80% 

Prescription drugs. 

80% 

Emergency/accidental injury. 

100% 

Mental health care: 


Inpatient care (annual 30-day maximum; sub- 

80% 

ject to overall deductible). 


Outpatient care (annual 50-visit maximum; 

50% 

subject to overall deductible). 


Dental care: 


Rniitinfi . 

100% 

Rasic . 

80% 

Restorative/reconstructive. 

50% 

Routine physicals and tests. 

None 

Well-baby and well-child care. 

None 


2. Preventive Health Care Services—The typical pri¬ 
vate employment-based plan does not provide cover¬ 
age for routine, or “preventive” health care services 
not related to an illness. These would include periodic 
check-ups and health screenings (for example, pap 
smears, mammography, stool exams for occult blood); 
immunizations (e.g., tetanus, influenza, polio, DPT); 
and counseling programs (e.g., smoking, alcohol, 


weight, exercise). However, as presented in a 1988 
report entitled Implementing Preventive Services, some 
believe the “reimbursers may be shortsighted in fail¬ 
ing to provide financial incentives for prevention. If 
keeping people healthy is cheaper than remedying 
their illness, then prevention is not only a good in¬ 
vestment for society as a whole in terms of the return 
of health benefits for dollars expended but may be 
profitable in the narrow sense for the reimburser as 
well, by reducing total dollar outlays.” 4 

The U.S. Preventive Services Task Force released 
a report in May 1989 (Guide to Clinical Preventive 
Services) that provides recommendations on more than 
100 interventions for 60 potentially preventable dis¬ 
eases and conditions, designed to help health care 
providers select the most appropriate and effective 
preventive interventions for patients. 5 The report also 
includes information on the burden of suffering for 
the preventable conditions (e.g., morbidity, mortality, 
cost of treatment, etc.) and the proven effectiveness of 
the intervention, based on the quality of the published 
research evidence. The report provides examples of 
the benefits of including prevention in medical prac¬ 
tice, including: 

—the decline of infectious diseases such as polio¬ 
myelitis, rubella, diphtheria, and pertussis due to 
childhood immunization; 

—reductions in morbidity and mortality due to 
early detection of diseases such as stroke 
(through screening for hypertension), cervical 
cancer (through pap tests), and childhood meta¬ 
bolic disorders (through routine newborn screen¬ 
ing and treatment); 

—effects on the leading causes of death through 
counseling on personal health behaviors such 
as smoking, physical inactivity, diet, sexual 
practices. 

The report cited lack of reimbursement for preventive 
services as one reason why physicians often fail to 
provide recommended clinical preventive services. 

However, the effects of preventive services on 
health status and on cost are not entirely clear. Cer¬ 
tain preventive services, such as immunizations, are 
not without risk (and resulting cost). Other preventive 
services, such as tests for hypertension, will not in 
themselves result in improved health status, and 
follow-up therapy, such as drug therapy for high 
blood pressure, will not necessarily reduce medical 


4 Robert G. Evans, “Economic Barriers to Preventive Services: Clinical 
Obstacle or Fiscal Defense,” in Implementing Preventive Services, ed. Renaldo 
N. Battista and Robert S. Lawrence, American Journal of Preventive Medicine 
(New York: Oxford University Press, 1988), 114. 

5 U.S. Preventive Services Task Force, Guide to Clinical Preventive Services 
(Washington, D.C.): 1989. 


61 



















expenditures. As stated in Is Prevention Better Than 
Cure?, “The evidence also shows that, even after 
allowing for savings in treatment, prevention usually 
adds to medical expenditures, contrary to the popular 
view that it reduces them. Evaluations of a number of 
significant preventive measures—several of which 
have been reviewed in this study—support this con¬ 
clusion. ... In some cases prevention may save 
money in other, nonmedical, sectors of the economy. 
Studies of the measles vaccine and of lead screening 
for young children both indicate that these proce¬ 
dures reduce expenditures for institutionalization and 
special education by preventing retardation among 
children. It is not possible, however, to conclude that 
there are usually savings elsewhere because most anal¬ 
yses have not looked beyond medical expendi¬ 
tures. . . . What really matters is not whether a 
preventive measure adds to costs in a particular 
sector, or reduces them, but the total costs it involves, 
wherever they occur. These results show that preven¬ 
tion cannot be assumed to be a better choice than 
cure in every case. Individual measures must be eval¬ 
uated on their merits.” 6 

Prenatal care is considered another type of preven¬ 
tive service. As discussed in a 1987 report by the 
Office of Technology Assessment (OTA), Health 
Children: Investing in the Future, “prenatal care en¬ 
compasses a wide range of preventive, diagnostic, and 
therapeutic service delivered throughout the course of 
pregnancy, with the goal of both a healthy baby and 
a healthy mother. . . . Because prenatal care includes 
not only preventive interventions such as screening 
and counseling but also treatment when needed, it is 
bound to be effective in altering the health of some 
mothers and infants.” 7 

Although OTA found shortcomings in almost all 
the studies of prenatal care reviewed, it concluded 
that “the weight of the evidence from more than 55 
studies of the effectiveness of earlier, more frequent, 
or enriched prenatal care services supports the con¬ 
tention that two key birth outcomes—low birthweight 
and neonatal mortality—can be improved with earlier 
and more comprehensive prenatal care, especially in 
high-risk groups such as adolescents and poor 
women. . . . OTA estimated that for every low 
birthweight birth averted by earlier or more frequent 
prenatal care, the U.S. health care system saves be¬ 
tween $14,(XX) and $30,000 in newborn hospitalization, 
rehospitalization in the first year, and long-term 
health care costs associated with low birthweight.” 8 * 


6 Louise B. Russell, Is Prevention Better Than Cure? (Washington, D.C.: 
The Brookings Institution, 1986), 110-111. 

7 Office of Technology Assessment. Healthy Children: Investing in the 
Future (Washington, D.C.: Government Printing Office, 1987), 8. 

8 Healthy Children, 9. 


Another study, The Financing of Maternity Care in 
the United States, conducted by the Alan Guttmacher 
Institute, found that in 1980, 8 percent of mothers 
received insufficient prenatal care and 26 percent 
received an intermediate level of care; 66 percent ob¬ 
tained sufficient care. 9 For 1980, the sources of pay¬ 
ment for prenatal care were found to be as follows: 
private insurance (41 percent), the mother and/or her 
family (35 percent), Medicaid (8 percent), other (16 
percent). For women whose incomes were 150-199 
percent of poverty, 70 percent paid for their prenatal 
care themselves. 10 

Private insurance coverage of prenatal care varies 
according to the size of the employer (for employer- 
based coverage) and State law and regulations. The 
Pregnancy Discrimination Act of 1978 (P.L. 95-555) 
requires employers of 15 or more employees, and self- 
insured employers, who offer health insurance to 
cover pregnancy care in the same manner as other 
medical care. Thus, coverage of prenatal care is im¬ 
plicit in most plans of employers with 15 or more 
employees. However, small employers, nonspouse de¬ 
pendents, and those with privately obtained insurance 
coverage not related to the workplace are not cov¬ 
ered by the Pregnancy Discrimination requirement. 
Such plans may exclude or limit their benefits for pre¬ 
natal care; waiting periods, pre-existing condition 
clauses, and exclusion of coverage for nonspouse de¬ 
pendents (e.g., a teenage daughter) may also affect 
coverage of prenatal care. 11 

3. EnroUees’ Financial Means—Implicit in determin¬ 
ing a standard for “basic” health care benefits is an 
understanding of financial means of the population to 
be covered by the health plan. The financial means of 
the population is important in determining whether 
the health plan covers a “sufficient” proportion (how¬ 
ever defined) of the medical expenses of the enrollees 
and thus assures that their income is not a barrier to 
their receiving and paying for medical services. 

If a health plan’s benefits cover the full cost of the 
medical bills incurred by enrollees and no premium 
contribution is required of enrollees, then the income 
of the enrollee is irrelevant in determining whether 
the health plan makes health care services affordable 
for the enrollee. But the benefits of all current health 
plans, both public and private, leave the enrollee with 
certain out-of-pocket costs. These out-of-pocket costs 
result from uncovered services, services in excess of 
the plan’s limits on number of days or visits, cost¬ 
sharing amounts such as deductibles and coinsurance, 


9 The Alan Guttmacher Institute, The Financing of Maternity Care in the 
United States (New York, N.Y.: December 1987), 27. 

10 Financing Maternity Care, 105. 

11 Financing Maternity Care, 263. 


62 




the portion of providers’ charges in excess of the 
plan’s payment limits (also known as “balance bill¬ 
ing”), and premium amounts required of enrollees. 

Theoretically, the goal of most insurance is to pro¬ 
vide payment for the most unexpected and costly of 
events. This goal would lead one to, at the very least, 
design benefits to cover catastrophic health care ex¬ 
penses. However, a medical expense that is financially 
catastrophic to a low income individual or family may 
be a routine, budgetable amount for a wealthy person 
or family. This dilemma highlights the issue of how to 
provide health plan coverage of large medical bills. 

“Catastrophic” health plan benefits are those which 
provide protection against the high cost of treating 
severe or lengthy illness or disabilities. Thus, it is not 
the severity of the illness but its expense that deter¬ 
mines whether it is catastrophic in a financial sense. 
There is no commonly accepted definition of what 
constitutes a catastrophic medical expense, except that 
the expense must be the liability of the individual or 
family and not reimbursable by some health plan. This 
lack of definition arises in part because its determina¬ 
tion depends on the financial resources of the individ¬ 
ual or family to pay for the expense. Two methods 
are commonly used to define catastrophic expenses. 

The first method uses a fixed-dollar threshold (for 
example, $2,000) to determine whether out-of-pocket 
(uninsured) expenses are catastrophic. The second 
method measures the out-of-pocket expense relative to 
the income of the individual or family (for example, 
10 or 15 percent of income). The income-related 
measure, while tailoring benefits to the financial cir¬ 
cumstances of the covered population, is administra¬ 
tively more complex. The threshold level and the 
method chosen to determine whether the limit has 
been reached can lead to very different results in 
terms of the numbers and characteristics of those at 
risk for catastrophic expenses. 

Thus, whether a person’s medical expenses are “cat¬ 
astrophic” depends on the extent of their health plan 
coverage (if any) and their ability to pay. The features 
of a health plan that help determine whether it pro¬ 
vides catastrophic coverage include (a) the extent of 
its benefits, particularly for the more expensive serv¬ 
ices such as inpatient hospital care (e.g., coverage for 
365 days of inpatient hospital care rather than 30 
days), and (b) any out-of-pocket (e.g., “catastrophic”) 
limit on enrollee cost-sharing amounts, which is usu¬ 
ally a fixed-dollar amount above which the plan pays 
100 percent of the allowable charges for covered 
services. Since most health plans, whether private or 
public, pay for acute care services only, the cata¬ 
strophic features of current health plans generally do 


not cover catastrophic expenses associated with long¬ 
term care services. 

Most private employment-based health plans limit 
out-of-pocket liability through the first method, a 
fixed-dollar limit, typically $1,000 per person or 
$2,000 per family in medium to large employer health 
plans. According to the Employee Benefit Research 
Institute (EBRI), only 4 percent of workers in 
medium to large employer plans have out-of-pocket 
limits based on a measure of income, their earnings. 12 

4. Population To Be Covered—Determining the 
characteristics of the population to be covered is basic 
to the design of a health benefits plan. For example, is 
it intended that the health benefits cover all of the un¬ 
insured or a target group such as uninsured children, 
uninsured workers and families, low-income mothers 
and children, or those who are medically high risk be¬ 
cause of a preexisting illness? Is the plan to be afford¬ 
able to those of varying income levels? 

Once the covered population and its characteristics 
(e.g., age, income) are determined, a health plan can 
be designed so that it covers the types of services 
suited to the population and with cost-sharing 
amounts (and at a premium, if required) that the 
population can afford. If the target population is chil¬ 
dren, then coverage of preventive services such as 
prenatal and well-baby/well-child care could be in¬ 
cluded. If the plan is to be affordable to those of all 
incomes or if the low-income are targeted for cover¬ 
age, then large cost-sharing amounts (deductibles and 
coinsurance) may not be appropriate. 

The issue of affordability is complicated by the fact 
that if the enrollee is required to pay all or a portion 
of the premium, one way of reducing the premium 
cost so it is more affordable for low-income enrollees 
is to raise the plan’s cost-sharing requirements. How¬ 
ever, this would mean that although all enrollees (in¬ 
cluding the low income) would pay lower premiums, 
enrollees who use medical care services would pay a 
larger share of their medical bills because of the 
larger cost-sharing requirements, which could be a 
burden to the low-income with medical bills. 

5. Other Health Benefits Issues—Other questions 
may be raised about the coverage included in a health 
benefit plan. Will the plan cover benefits for pre-exist¬ 
ing conditions? What type of provider may provide 
the services and be paid or reimbursed by the health 
plan? For example, will the plan pay for services pro¬ 
vided by nonphysician providers)? Will experimental 


12 Employee Benefit Research Institute, Financing Catastrophic Health Care 
Costs Among the Nonelderly Population, EBRI Issue Brief No. 71 (Washing¬ 
ton, D.C.: October 1987). 


63 



technologies be covered and, if so, under what 
guidelines? 


Health Benefit Plan Options 

Described below are health plan options that vary 
in the types of health care services covered and in 
their cost-sharing requirements. These variations at¬ 
tempt to include benefits tailored to the needs and fi¬ 
nancial means of different populations, as discussed 
above. 

It is assumed that all options cover prenatal care 
and none exclude coverage for preexisting conditions. 
The percentages given are the proportion of covered 
expenses paid by the plan. 

1. Option 1: The Typical Plan —The term “typical” 
is used here to describe a plan whose benefits are typ¬ 
ical of plans sponsored by large and medium private 
employers (as described in more detail above). In 
summary, such plan provides comprehensive cover¬ 


Option 1: The Typical Plan 


Benefit 

Plan provisions 

Overall deductible (per person/family; applies 

$100/$300 

to all benefits except hospital and emergen¬ 
cy services). 


Annual out-of-pocket limit (per person/ 

$1,000/$2,000 

family; counts only nonmental health coinsur¬ 
ance toward the limit). 


Hospital services (365-day per stay maximum). 

100% 

Hospital alternatives (extended or home 

Yes 

health care). 


Surgical services. 

80% 

Physician services. 

80% 

X-rays and laboratory. 

80% 

Prescription drugs. 

80% 

Emergency/accidental injury. 

100% 

Mental health care: 


Inpatient care (annual 30-day maximum; sub- 

80% 

ject to overall deductible). 


Outpatient care (annual 50-visit maximum; 

50% 

subject to overall deductible). 

Dental care: 


Routine. 

100% 

Basic. 

80% 

Restorative/reconstructive. 

50% 

Routine physicals and tests. 

Not covered 

Well-baby/well-child care. 

Not covered 


age of medically necessary services and a catastrophic 
limit on out-of-pocket expenses. It does not cover pre¬ 
ventive services such as routine examinations, screen¬ 
ing tests, or well-baby/well-child care. The specific 
benefits are included in the table below. 

2. Option 2: Typical Plan Plus Preventive Care —Re¬ 
search indicates that certain preventive care services 
(immunizations, screening, and counseling) can pre¬ 
vent or mitigate the effects of disease. Although theo¬ 
retically all persons could benefit from health plan 
coverage of preventive care services, presumably the 
low income would benefit the most. While those of 
higher incomes may seek out and receive preventive 
services (such as immunizations) whether or not they 
are covered by insurance, the low income are more 
likely to go without such services if they are not cov¬ 
ered. Therefore, this option includes all the benefits of 
the typical plan, plus coverage of (a) routine physicals 
and tests, and (b) well-baby/well-child care, both of 
which are subject to the overall plan deductible and 
are paid for at 80 percent of the reasonable and cus¬ 
tomary charges. 


Option 2: Typical Plan Plus Preventive Care 


Benefit 

Plan provisions 

Overall deductible (per person/family; applies 

$100/$300 

to all benefits except hospital and emergen¬ 
cy services). 


Annual out-of-pocket limit (per person/ 

$1,000/$2,000 

family; counts only nonmental health coinsur¬ 
ance towards the limit). 


Hospital services (365-day per stay maximum). 

100% 

Hospital alternatives (extended or home 

Yes 

health care). 


Surgical services. 

80% 

Physician services. 

80% 

X-rays and laboratory. 

80% 

Prescription drugs. 

80% 

Emergency/accidental injury. 

100% 

Mental health care: 


Inpatient care (annual 30-day maximum; sub- 

80% 

ject to overall deductible). 


Outpatient care (annual 50-visit maximum; 

50% 

subject to overall deductible). 

Dental care: 


Routine. 

100% 

Basic. 

80% 

Restorative/reconstructive. 

50% 

Routine physicals and tests. 

80% 

Well-baby/well-child care. 

80% 


64 






























3. Option 3: Reduced Typical Plus Preventive Care— 

This benefit package includes coverage of the services 
historically covered by insurance plans, including hos¬ 
pital, surgical, physician, X-rays and lab, prescription 
drugs, and emergency/accidental injury care. It also 
includes coverage of preventive services such as rou¬ 
tine physicals and tests, and well-baby/well-child 
care. In order to reduce the cost of the plan, Option 3 
(a) does not include coverage of mental health care 
and dental benefits, and (b) has higher enrollee cost¬ 
sharing amounts and a higher annual out-of-pocket 
limit than Option 1 (the Typical Plan). 

While the total premium for this plan would be 
lower than that of Option 2 (Typical Plan Plus Pre¬ 
ventive Care) because mental health and dental bene¬ 
fits are not included and the enrollee cost sharing is 
increased, the plan is more costly to enrollees because 
they are required to pay a greater share of their cov¬ 
ered medical expenses. Thus, this plan would not be 
as appropriate for low income enrollees. 


Option 3: Reduced Typical Plus Preventive Care 


Benefit 

Plan provisions 

Overall deductible (per person/family; applies 

$200/$400 

to all benefits except hospital and emergen¬ 
cy services). 


Annual out-of-pocket limit (per person/ 

$2,000/$4,000 

family; counts only nonmental health coinsur¬ 
ance towards the limit). 


Hospital services (365-day per stay maximum). 

80% 

Hospital alternatives (extended or home 

Yes 

health care). 


Surgical services. 

75% 

Physician services. 

75% 

X-rays and laboratory. 

75% 

Prescription drugs. 

75% 

Emergency/accidental injury. 

100% 

Mental health care. 

Not covered 

ripntal mtp . 

Not covered 

Routine physicals and tests. 

75% 

Well-baby/well-child care. 

75% 


4. Option 4: Tailored Plan—This plan is the same as 
the “tailored” plan designed by the Congressional Re¬ 
search Service as an illustrative plan tailored to the 
perceived health care needs of the currently unin¬ 


sured population. 13 The plan’s benefits were chosen 
in order to meet two goals. First, the plan was de¬ 
signed to be less costly. Second, it was designed for 
the uninsured, who are a relatively young, lower- 
income population. Thus, the plan places more em¬ 
phasis on preventive care than Option 1 (the Typical 
Plan), and has lower deductibles and coinsurance. To 
meet these cost and benefit objectives, this plan was 
designed with less coverage for long hospital stays 
(14-day annual maximum) and with no annual out-of- 
pocket limit. There is no annual out-of-pocket limit 
because the enrollee is responsible for few cost-shar¬ 
ing amounts. 


Option 4: Tailored Plan 


Benefit 

Plan provisions 

Overall deductible (per person/family; applies 

$50/$150 

to all benefits except emergency services) 


Annual out-of-pocket limit. 

None 

Hospital services (14-day per stay maximum).... 

100% 

Hospital alternatives (extended or home 

Not covered 

health care). 


Surgical services. 

100% 

Physician services. 

100% 

X-rays and laboratory. 

100% 

Prescription drugs. 

$2/prescription 

Emergency/accidental injury. 

100% 

Mental health care. 

Not covered 

Dental care. 

Not covered 

Routine physicals and tests. 

100% 

Well-baby/well-child care. 

100% 


5. Option 5: Catastrophic Plan—This plan is the 
same as the catastrophic plan designed by the Con¬ 
gressional Research Service as an illustrative plan 
designed to deal solely with the circumstance of indi¬ 
viduals whose medical expenditures are quite large 
relative to their incomes. 14 The plan requires a de¬ 
ductible related to income and family size before ben¬ 
efit eligibility would begin. The deductible would 
equal 25 percent of total income less personal exemp¬ 
tions (e.g., family size) for families with total income 
no greater than $75,000. For families with total 
income above $75,000, the deductible would be 25 


13 U.S. Congress, House Committees on Education and Labor, Energy and 
Commerce, and Senate Special Committee on Aging, Cost and Effects of Ex¬ 
tending Health Insurance Coverage, 100th Congress, 2d Sess., October 1988, 
63-139. 

14 Extending Health Insurance Coverage, 63-139. 


65 






























percent of total income less personal exemptions for 
the first $75,000 of total income, and 35 percent of 
any income above $75,000. For example, a family of 
four with total income of $20,000 would have a de¬ 
ductible of $3,100 (assuming personal exemptions are 
$1,900 each). 

Under Option 5, if an enrollee’s out-of-pocket 
family health care expenditures exceed the income-re¬ 
lated deductible, the enrollee would be required to 
pay coinsurance of 10 percent on the first $5,000 of 
covered expenditures in excess of the deductible. 
Thus, maximum yearly out-of-pocket liability for cov¬ 
ered expenses under this option would equal the de¬ 
ductible plus $500. 

Option 5’s cost would be significantly less than that 
of the other more comprehensive plan options be¬ 
cause of its uncovered services (mental health, dental, 
routine physicals and tests, and well-baby/well-child 
care) and its large enrollee cost-sharing amounts. 


Option 5: Catastrophic Plan 


Benefit 

Plan provisions 

Overall deductible (applies to all benefits).. 

Related to income 
and family size 

Annual out-of-pocket limit. 

$5,000 

Hospital services (365-day per stay maxi- 

90% 

mum). 


Hospital alternatives (extended, home 

90% 

health care). 


Surgical services. 

90% 

Physician services. 

90% 

X-rays and laboratory. 

90% 

Prescription drugs. 

90% 

Emergency/accidental injury. 

90% 

Mental health care. 

Not covered 

Dental care. 

Not covered 

Routine physicals and tests. 

Not covered 

Well-baby/well-child care. 

Not covered 


Plan Cost 

The total cost of a health plan is a function of sev¬ 
eral factors, including health benefits design, the cost 


of medical care in a given geographic location, and 
the type and amount of services used by an individual 
or group covered by the plan. 

One health benefits design issue is to fashion the 
benefits so that the plan’s cost is affordable for the 
payer (e.g., the employer, the enrollee [if premium 
contributions are required], or the government). This 
goal is frequently in conflict with the goal of provid¬ 
ing comprehensive coverage, since plan affordability 
is generally achieved either by (1) limiting benefits, 
which lowers the total plan costs, or (2) sharing costs 
between the plan sponsor and the enrollee in such a 
way that the enrollee pays a lesser or greater share of 
the cost of the benefits and the premiums, which re¬ 
sults in increased or lowered cost to the plan sponsor. 

As described in the various health plan options 
above, health plan design can be altered to attempt to 
meet certain cost requirements. A plan designed for 
the low income (such as Option 4, the Tailored Plan) 
would have little or no enrollee cost-sharing require¬ 
ments (e.g., deductibles, coinsurance) because these 
would serve as financial barriers to care. 


What Is the Framework for Health Plan 
Benefits? 

Clearly, once a health benefits plan has been deter¬ 
mined, it needs a framework or setting in which it 
will be applied. For example, the health benefits plan 
can be used in the following settings: 

—a minimum or standard plan which must be cov¬ 
ered by all State Medicaid programs, 

—a minimum or standard plan that all employers 
must offer under an employer mandate, 

—a minimum or standard plan that any insurer can 
market, 

—a minimum plan or standard plan that must be 
sold/purchased in order for the seller or pur¬ 
chaser to receive favorable Federal tax treatment, 
or 

—a minimum or standard plan for universal health 
insurance coverage. 

The setting will determine the population to be 
covered by the plan and also will focus more clearly 
a decision on how the health plan will be paid for 
(i.e., by the Federal Government, by employers, by 
enrollees, etc.). 


66 
















PREVENTIVE HEALTH SERVICES 


Melvina Ford and Mark Merlis * 


This memorandum is in response to your request 
for information on preventive health services. It does 
not include public health initiatives in reduction of en¬ 
vironmental hazards, or in industrial or public safety, 
but focuses on preventive services that can be pro¬ 
vided in clinical settings. 

The first section of the memorandum defines pre¬ 
ventive health services. The second section contains 
data on utilization of the most commonly studied pre¬ 
ventive services and some of the factors affecting 
utilization. The third section of the memorandum de¬ 
scribes provisions for covering preventive services 
under public and private health insurance plans. The 
fourth section reviews evidence on the benefits of 
preventive services and the recommendations that are 
made by professional associations and others for the 
use of preventive services. 


DEFINITION OF PREVENTIVE 
SERVICES 

Preventive health services may be divided between 
primary services, which are intended to prevent or 
delay the onset of disease, and secondary services 
which have the goal of detecting illness early enough 
for effective treatment. In clinical practice, the provi¬ 
sion of preventive services takes the form of im¬ 
munizations, screening, and health education and 
counseling. In addition, periodic health examinations, 
prenatal care and well-child care provide opportu¬ 
nities for identifying medical problems and lifestyle 
factors that may place a person at particular risk for 
disease. 

Immunizations create resistance to infectious and 
communicable diseases. Administered to persons who 
show no evidence of disease, immunizations almost 


* Report prepared by Melvina Ford, Analyst in Social Legislation and 
Mark Merlis, Specialist in Social Legislation, Education and Public Welfare 
Division, Congressional Research Service, February 1, 1990. 


completely prevent the occurrence of disease. Chil¬ 
dren are routinely given a basic series of immuni¬ 
zations. For adults, tetanus immunizations are 
recommended every 10 years and others are recom¬ 
mended according to age and other risk factors. 

Screening consists of standardized examinations ap¬ 
plied to individuals who have no symptoms of disease, 
in order to detect disease or a precursor early enough 
for effective treatment. For example, newborn babies 
are routinely tested for certain conditions which, 
without early detection and treatment, result in severe 
mental retardation. If a screening procedure is to 
result in an improved outcome relative to conven¬ 
tional diagnosis after symptoms are present, the pro¬ 
cedure should accurately detect an early stage of a 
disease or condition sooner than it could be detected 
without the screening examination, and there should 
be an effective therapy available for treating the 
condition. 

Education and counseling interventions provide in¬ 
formation and advice regarding personal behaviors to 
reduce the risk of subsequent illness. 

Periodic health examinations (PHE) are overall 
screening examinations. The frequency and content 
are tailored by the clinician to the patient’s age, sex, 
medical history, and personal habits. The tailoring 
allows the clinician to use the preventive measures 
likely to be most effective for each patient. 

Prenatal care encompasses a range of preventive, di¬ 
agnostic and therapeutic services delivered with the 
goal of improving birth outcomes and the health of 
the mother. Preventive care can consist of education 
and counseling or screening for potentially harmful 
conditions in the mother or child. 

Well-child care consists of various health services 
aimed at improving the health of children and having 
a favorable influence on their health as adults. Major 


67 



aspects of well-child care are immunization and health 
supervision. Immunizations are standardized and re¬ 
quired by State laws. Health supervision includes 
periodic health examinations, health education and pa¬ 
rental counseling. 


DATA ON UTILIZATION OF 
PREVENTIVE SERVICES 1 

There is a limited number of studies on the extent 
to which preventive services are offered by clinicians 
or received by patients. The studies that do exist do 
not investigate the use of preventive services in gen¬ 
eral, but are limited to specific procedures such as 
mammograms, or to specific illnesses or risk factors 
such as coronary heart disease or smoking. This 
leaves a lack of data on utilization of periodic exami¬ 
nations. Studies may be further limited by small 
sample sizes, non-random samples or confined geo¬ 
graphic areas. This section reviews available utiliza¬ 
tion data from national studies or surveys. Some of 
the studies relied on in this section compare utilization 
to standards or recommendations that are discussed in 
greater detail later in this memorandum. 


Children 

There is very little information on children’s utiliza¬ 
tion of health supervision or other preventive serv¬ 
ices. The one service category for which adequate 
data exist is immunization. The Centers for Disease 
Control estimates immunization levels for children en¬ 
tering school at 98 percent in 1989. 2 Among children 
under age 2, it is estimated that 75 to 80 percent have 
received the basic immunization series. 3 Levels of im¬ 
munization are 10 to 16 percent lower for non-white 
children and for children living in central city areas. 4 
Many parents delay having their children immunized 
until school entry age. As a result, because it is often 
the pre-schoolers who succumb to childhood diseases, 
control of vaccine-preventable diseases is weakened. 


1 In this section, data from the Louis Harris and Associates survey and 
from the 1982 National Health Interview Survey are from: U.S. Department 
of Health and Human Services, Public Health Service, Office of Disease Pre¬ 
vention and Health Promotion, Disease Prevention/Health Promotion, THE 
FACTS (Palo Alto, Calif.: 1988). 

2 U.S. Department of Health and Human Services, Fiscal Year 1990 Justifi¬ 
cation of Appropriation Estimates for Committee on Appropriations, vol. 2 
(Washington, D.C.: 1989), 61. 

3 U.S. Department of Health and Human Services, Public Health Service, 
Draft of Promoting Health/Preventing Disease: Year 2000 Objectives for the 
Nation (Washington, D.C.: 1989). (Hereafter cited as U.S. Department of 
Health and Human Services, Draft of Promoting Health/Preventing Disease.) 

4 U.S. Congress, Office of Technology Assessment, Healthy Children: In¬ 

vesting in the Future (Washington, D.C.: Government Printing Office, Febru¬ 

ary 1988), 143. (Hereafter cited as Office of Technology Assessment, Healthy 

Children.) 


Adult Immunizations 

Information on adult immunization status is 
fragmented. The Public Health Service (PHS) has 
estimated that in 1985 10 percent of the non-institu- 
tionalized high risk population had received pneumo¬ 
coccal vaccine and 20 percent had received influenza 
vaccine; the goal of the PHS for the year 2000 is im¬ 
munization of 60 percent of this population. 5 Studies 
show use of influenza vaccine about 60 percent of the 
time it is indicated. 6 With no baseline data available, 
the goal of the PHS for the year 2000 is 80 percent 
immunization against pneumococcal pneumonia and 
influenza among institutionalized chronically ill and 
elderly. 7 


Adult Screening 

Data from the 1982 National Health Interview 
Survey (NHIS) suggests that use of screening services 
increases with education and income. About 90 per¬ 
cent of the women reported ever having a Pap smear 
or breast examination. Women with less than 12 
years of education and household incomes under 
$10,000 were more likely never to have had 
either examination. 

A national survey conducted by Louis Harris and 
Associates in 1985 supported findings from the NHIS. 
For example, while 78 percent of the women reported 
having a Pap smear every 1 or 2 years, this was most 
likely among women with some college education and 
household incomes of $25,000 or more. Similarly, as 
48 percent of the respondents claimed to have annual 
cholesterol testing, those most likely to have been 
tested were over 40 years old and in a $50,000 income 
bracket. 

Both the Louis Harris survey and the NHIS found 
that over 85 percent of the population received 
annual blood pressure readings with no differences in 
income, occupation or education. The Louis Harris 
survey found that blacks were most likely to have a 
blood pressure reading more often than once a year. 

Makuc, et al., comparing data from the 1973 and 
1974 National Health Interview Surveys to data from 
the 1985 National Health Interview Surveys con- 


5 U.S. Department of Health and Human Services, Draft of Promoting 
Health/Preventing Disease, 12-14. 

6 Charles E. Lewis, “Disease Prevention and Health Promotion Practices 
of Primary Care Physicians in the United States,” in Implementing Preventive 
Services, eds. Renaldo N. Battista and Robert S. Lawrence (New York: 1988), 
9-15. (Hereafter cited as Lewis, Implementing Preventive Services.) 

7 U.S. Department of Health and Human Services, Draft of Promoting 
Health/Preventing Disease, 2-14. 


68 




firmed that black women are most likely to be tested, 
not only for hypertension but, in 1985, for cervical 
and breast cancers as well. The researchers found that 
while poor women continued to be least likely to be 
screened, they had made substantial gains in the use 
of tests over the period. In 1985, the percent of 
women with a recent Pap test or breast exam was 10 
to 13 percentage points lower among poor women 
than among the non-poor with two exceptions: among 
black women 60 to 79 years of age, the difference was 
only 4 percentage points lower for Pap smears and 5 
percentage points lower for breast examinations. Be¬ 
tween 1973 and 1985, the percent of women with 
recent breast examinations increased more for the 
poor of both races than for the non-poor. Also, the 
percentage of women who had never had a Pap 
smear or a breast examination was highest among 
older poor women (18%) than among other 
subgroups. However, it was older poor women and 
black women who accounted for substantial gains in 
the use of tests between 1973 and 1985.® 


Prenatal Care 

Although 93 percent of the mothers responding to 
the Louis Harris survey mentioned above reported 
having sought prenatal care during the first 3 months 
of pregnancy, other sources indicate the national 
number is closer to 75 percent. 9 The 25 percent who 
do not receive early prenatal care are the poor, the 
uninsured and racial minorities. Women in these 
groups are also likely to make fewer than the recom¬ 
mended number of visits for prenatal care. 10, 11 


Health Education and Counseling 

There are more data on counseling for smoking 
than for other risk factors. Audits of patient charts 
show about 63 percent of smokers advised by physi¬ 
cians to stop smoking. 12 With regard to other lifestyle 
factors, surveys of family physicians indicate dietary 
counseling is provided to about 58 percent of those at 
risk, and exercise counseling for sedentary individuals 
to about 25 percent. 13 

8 Diane M. Makuc, Virginia M. Freid and Joel C. KJeinman, “National 
Trends in the Use of Preventive Health Care by Women,” American Journal 
of Public Health, 79 (1) (January 1989): 21-26. (Hereafter cited as Makuc. 
American Journal) 

* General Accounting Office, Prenatal Care Medicaid Recipients and Unin¬ 
sured Women Obtain Insufficient Care (September 1987). 

10 General Accounting Office, Human Resources Division, PRENATAL 
CARE Medicaid Recipients and Uninsured Women Obtain Insufficient Care 
(Washington, D.C.: 1987), chap. 2. 

11 The Alan Guttmacher Institute, The Financing of Maternity Care in the 
United States (New York: 1987), 30-32. 

12 Lewis, Implementing Preventive Services, 9-15. 

13 Lewis, Implementing Preventive Services, 9-15. 


FACTORS IN UTILIZATION 

As the utilization data suggest, income, education 
and minority status are often correlated with failure 
to receive health care, including preventive services. 
Financial access, in particular, has been cited as criti¬ 
cal. Two studies analyze receipt of preventive serv¬ 
ices with particular attention to costs and availability 
of third-party payment for services. 

Woolhandler and Himmelstein examined data from 
the 1982 National Health Interview Survey to explore 
the relationships between insurance coverage and re¬ 
ceipt of blood pressure check-ups, clinical breast ex¬ 
aminations, and Pap smears by middle-aged women. 
Screening was deemed inadequate if it did not meet 
published guidelines for optimal frequency. Eighty- 
eight percent of the sample were adequately screened 
for hypertension, and 62 percent for breast cancer. 
For 73 percent of the women, Pap tests were ade¬ 
quate. The investigators found that the poor and the 
uneducated were least likely to be screened and black 
women were more likely to be screened. However, in 
all subgroups, lack of insurance was the strongest pre¬ 
dictor of receipt of preventive services. The authors 
concluded that because the socioeconomically disad¬ 
vantaged who make up most of the uninsured are at 
particularly high risk for preventable illness, inad¬ 
equate insurance coverage leads to reverse targeting 
of preventive care. That is, those who would benefit 
most are least likely to receive it. 14 

The second study, by Nicole Lurie et al., looked at 
whether insurance coverage was an important deter¬ 
minant of the amount of preventive care received by 
enrollees during a 3-year period in the Rand Health 
Insurance Experiment (HIE). The HIE was a trial of 
cost sharing on the demand for health services; par¬ 
ticipants were assigned to either free care or one of 
several levels of cost sharing. The participant popula¬ 
tion was considered to be a representative sample of 
the U.S. population under age 65. The population was 
broad enough to enable the investigators to look at 
how different age groups used a range of recom¬ 
mended preventive services. 

This study showed that enrollees in the HIE re¬ 
ceived far fewer preventive services than recom¬ 
mended. Only 45 to 60 percent of young children 
received timely immunizations. Seven percent of the 
children received no well child care in their first 18 
months of life. Only 2 percent of the women aged 45 
to 64 received mammography. One percent of the 


14 Steffie Woolhandler and David U. Himmelstein, “Reverse Targeting of 
Preventive Care Due to Lack of Health Insurance,” Journal of the American 
Medical Association, 259 (19) (May 20, 1988): 2872-2874. 


69 




adults received preventive sigmoidoscopy. The most 
frequently performed screening procedure was Pap 
smears, provided to 57 percent of the middle-aged 
women and to 66 percent of younger women. 

Cost sharing was associated with reduced use of 
preventive services. Fifty-nine percent of the children 
in the free plans received some immunization com¬ 
pared to 49 percent of the children in the cost sharing 
plans. Sixty-five percent of the middle-aged women in 
the free plan received Pap smears compared to 52 
percent of the women in the cost sharing plans. Al¬ 
though cost sharing affected utilization, even enrollees 
in the free plan did not receive all recommended serv¬ 
ices. Therefore, the researchers concluded that cost 
sharing is not the only obstacle to receipt of preven¬ 
tive care. 15 

Non-financial obstacles to preventive care may rest 
with the attitudes and knowledge of either the physi¬ 
cian or the patient or with the health care delivery 
system that affects them both. 

A variety of explanations have been offered for 
physicians’ failure to offer preventive services. Some 
physicians who see themselves primarily as healers 
may offer less preventive care, concentrating on the 
greater challenge of managing disease rather than 
maintaining health. Also, curative treatment may be 
felt more satisfying because it yields visible short term 
results rather than the uncertain outcomes of preven¬ 
tive care. These views may be reinforced by a lack of 
emphasis on prevention in medical training. Attitudes 
toward patients may also play a part, with physicians 
less likely to offer service if there is skepticism about 
the patient’s interest, willingness to pay for the serv¬ 
ice, or willingness to comply with advice. 16 

A physician may feel uncertain about his knowl¬ 
edge of effective counseling techniques or about the 
efficacy of a specific preventive service. When knowl¬ 
edge is not lacking, the physician establishes a priority 
for the most needed service to be provided. As stated 
by McPhee and Schroeder, “the public health benefit 
derived from giving a 50 year old man his sixth (life¬ 
time) tetanus immunization ... is insignificant when 
compared to the benefits from encouraging smoking 
cessation, detecting hypertension, or screening for 
hypercholesterolemia . . . .” 17 

One frequently offered explanation for physicians’ 
failure to provide preventive services cites the uncer- 


18 Nicole Lurie, et. al., “Preventive Care: Do We Practice What We 
Preach?” American Journal of Public Health, 77 (7) (July 1987): 801-804. 

16 Lewis, Implementing Preventive Services, 9-15. 

17 Stephen J. McPhee and Steven A. Schroeder, “Promoting Preventive 
Care: Changing Reimbursement Is Not Enough,” American Journal of Public 
Health, 77 (7) (July 1987): 780-781. 


tainties regarding the efficacy, frequency and side ef¬ 
fects of preventive services. The argument states, if 
experts do not agree, then a practicing physician 
cannot be expected to have either the knowledge or 
the commitment necessary to providing a service. 
Tests have not supported this argument. In a study of 
the factors related to vaccinating elderly patients 
against influenza, McKinney and Barnas found no re¬ 
lationships between physicians’ knowledge of the vac¬ 
cine’s efficacy or side effects and the decision to offer 
vaccine. In this study, only 41 percent of the patients 
eligible to receive the vaccine actually received it. 
Offers of vaccine were made most often to patients 
who had been vaccinated in the previous year. The 
authors also cited a report of a nursing home popu¬ 
lation in which only 33 percent of the residents 
were immunized even though the attending 
physicians expressed strong convictions in favor of 
immunization. 18 

Patients may not be inclined to seek preventive care 
that entails behavioral changes related to smoking, 
diet or exercise. Preventive care may be avoided be¬ 
cause of the discomfort, inconvenience or fear of side 
effects. Failure to actively seek prenatal care or im¬ 
munization for children may result from lack of 
awareness of the potential benefits. Similarly, patients 
may be unaware of standards for care that require 
that some procedures be done on a regular basis. 

Systemic barriers that affect both providers and pa¬ 
tients include lack of third-party reimbursement for 
preventive services, especially counseling, and a lack 
of system-generated cues for timely action. 


COVERAGE OF PREVENTIVE 
SERVICES 

Insurance coverage of preventive services has his¬ 
torically been very limited. Private health insurance 
plans and Medicare have generally denied payment 
for services not medically necessary for the diagnosis 
and treatment of illness or injury. Medicaid, the Fed¬ 
eral-State program for low-income individuals, has 
been an exception in offering substantial benefits for 
preventive services. More recently, some private 
health benefit plans have begun to add such benefits, 
and a few preventive services are now eligible for 
Medicare reimbursement. This section reviews the 
current preventive service provisions of public and 
private health insurance programs, as well as other 


18 W. Paul McKinney and Gary P. Barnas, "Influenza Immunization in the 
Elderly: Knowledge and Attitudes Do Not Explain Physician Behavior,” 
American Journal of Public Health, 79 (10) (October 1989): 1422-1424. 


70 




sources of funding for preventive services, such as 
Federal grant programs. 

It should be noted that some preventive services 
may be reimbursed under health plans even when the 
plans exclude such services. Many screening proce¬ 
dures may also be used as diagnostic techniques. The 
line between use of a given test for screening and use 
of the same test to diagnose illness may be an impre¬ 
cise one. Pap tests performed for screening purposes 
may be reimbursed if the provider reports cervicitis as 
a diagnosis when claiming payment; screening mam¬ 
mography may be reimbursed under the reported di¬ 
agnosis of chronic cystic mastitis. The extent to 
which preventive services are being covered in such 
circumstances cannot be determined. 


Private Health Insurance 

Preventive services have historically been excluded 
from private health insurance policies because the use 
of such services does not meet the traditional defini¬ 
tion of an “insurable event.” Insurance is based on 
pooling risk. Subscribers pay a premium to insure 
against liability for a large portion of the cost of a 
low-probability high cost event that will occur to 
only a few in the risk pool. Insurance coverage is at¬ 
tractive because covered events are unpredictable on 
an individual basis. The amount of the premium is 
much less than the total payment for the event but the 
aggregate premiums cover the costs of occurrences. 
Preventive services, however, are predictable along 
age/sex lines and can be used in some form by every¬ 
one. Consequently, the premium has to be set high 
enough to cover services to all subscribers, and cover 
profit and administrative costs to the insurer. From 
the insurers’ perspective, then, coverage of preventive 
services is really prepayment and not insurance. 

The general failure to cover preventive services 
might seem short-sighted if the provision of such 
services could reduce claims for more costly services 
in the future. The extent to which preventive care can 
actually produce long-term savings is discussed later 
in this memorandum. Given the current structure 
of the health insurance system, however, long-term 
savings may not be a consideration for insurers or 
employers in designing a benefit package. Insurers at¬ 
tempting to measure the cost-effectiveness of preven¬ 
tion must think in terms of costs and savings in a 
single policy year, because purchasers may shift from 
one insurer to another. If, as will be suggested below, 
the benefits of preventive services are not realized im¬ 
mediately, the insurer has no incentive to offer them. 
Employers’ incentives may be somewhat different. If 
an employer has relatively low turnover of workers, 


and can thus expect to be providing health benefits to 
the same pool of workers for many years, the em¬ 
ployer might have a greater interest in potential long¬ 
term savings. Even in the absence of this incentive, 
employees may press for coverage of preventive care 
through collective bargaining or other means. 

Thus, despite the traditional insurance treatment of 
preventive services, some employer health benefit 
plans have begun to add coverage of these services. A 
1988 Bureau of Labor Statistics (BLS) survey of 
medium and large firms found that 28 percent of 
health plan enrollees were covered for routine 
physicals, compared to 18 percent in 1986. 19 Other 
recent surveys also suggest that coverage of preven¬ 
tive services may be increasing. The Foster Higgins 
Health Care Benefits Survey found that 41 percent of 
surveyed firms offered physicals to some or all em¬ 
ployees in 1987, compared to 24 percent in 1986. 20 
The BLS survey also found growing coverage of 
other preventive services. In 1988, 31 percent of plan 
participants were covered for well-baby care and 29 
percent for immunizations. Some plans exempt pre¬ 
ventive services from the cost-sharing requirements 
applicable to other types of care. IBM, for example, 
will reportedly reimburse up to $200 per year in pre¬ 
ventive services with no deductible. 21 Statistics on 
the prevalence of this practice are not available. 

Health maintenance organizations (HMOs)—health 
insurers that provide or arrange covered services 
through affiliated providers instead of merely paying 
claims for services from any provider—have tradition¬ 
ally been more likely than other insurance plans to 
offer preventive services. The term “health mainte¬ 
nance organization” was coined in the early 1970s to 
reflect the view of HMO proponents that these plans 
were less costly than conventional plans because of 
their emphasis on preventive care. More recent evi¬ 
dence suggests that most HMO savings are achieved 
through other means, such as control of inpatient hos¬ 
pital services. However, coverage of preventive serv¬ 
ices remains a major distinction between HMOs and 
conventional plans. Federally qualified HMOs must 
provide as basic benefits periodic health assessments, 
well baby care, and immunizations. 22 As of June 


19 U.S. Department of Labor, Bureau of Labor Statistics, Employee Bene¬ 
fits in Medium and Large Firms, 1986 (Washington, D.C.: June 1987). 

20 A. Foster Higgins & Co., Foster Higgins Health Care Benefits Survey, 
1987 (New York: 1987). The difference between the BLS and Foster Higgins 
figures stems from the fact that the BLS survey considers only plans offered 
to all full-time workers, while Foster Higgins takes into account special plans 
offered to executives. 

21 Jonathan E. Fielding, “Economic and Social Deter min ants of Preven¬ 
tion in Health Care Provision in the United States,” Implementing Preventive 
Services, 1988. 

22 A Federally qualified HMO is one determined by the Department of 
Health and Human Services to meet minimum standards set forth in the 
HMO Act (Title XIII of the Public Health Service Act). Certain employers 


71 



1988, 76 percent of the 31 million HMO enrollees 
were in federally qualified plans subject to these re¬ 
quirements. 23 HMOs that are not federally qualified 
may be subject to State licensure laws that impose 
similar minimum benefits or may offer preventive ben¬ 
efits on their own (possibly because they are in com¬ 
petition with federally qualified plans). 

The BLS survey cited earlier found that 99 percent 
of participants in HMOs were covered for physicals 
and immunizations and 98 percent for well-baby care. 
Coverage of these services for participants in non- 
HMO plans ranged from 11 percent for physicals to 
15 percent for well-baby care. These figures suggest 
that much of the recent growth in preventive services 
coverage may stem from growth in the market share 
of HMOs, rather than from changes in conventional 
coverage options. Still, even non-HMO plans are be¬ 
ginning to offer these services to a greater extent than 
before. 

Plans that do not generally cover preventive serv¬ 
ices may offer them for a special class of employees, 
such as executives. The 1989 Hay/Huggins survey of 
medium and large employers found that 43 percent of 
plans covered physical examinations only for execu¬ 
tives, and another 6 percent had different policies for 
executives and other salaried employees. Only 15 per¬ 
cent offered coverage of physicals uniformly to all 
salaried employees. 24 (The Tax Reform Act of 1986 
added a new section 89 to the Internal Revenue 
Code, which would have denied tax preferences to 
plans that discriminated in favor of highly compen¬ 
sated employees. This provision was repealed in 1989, 
but there remain some restrictions on discriminatory 
plans offered by self-insured employers.) 

Supplemental preventive benefits may also be of¬ 
fered as part of a flexible benefits or “cafeteria plan,’’ 
under which employees may choose among such 
fringe benefits as child care, legal assistance, or en¬ 
hanced health benefits. A Wyatt Company survey 
found that 19 percent of firms offered flexible bene¬ 
fits in 1988. Of these, 71 percent offered as one of 
the optional benefits “medical care reimbursement 
accounts.” 25 In these arrangements, the employer 
contributes a specified sum to the account, and the 
employee can then draw on the account to cover 
services not otherwise available under the employer’s 
standard health benefit plan, such as preventive care. 


that offer health benefits may be required to offer an HMO option to their 
employees if there is a Federally qualified HMO in the area that seeks to be 
offered. 

23 InterStudy, The InterStudy Edge (Excelsior, Minn.: Fall 1988). 

24 Hay Management Consultants, Hay/Huggins Benefits Report (Philadel¬ 
phia: 1989). 

25 Wyatt Company, 1988 Group Benefits Survey Report (Washington, D.C.: 
1988). 


A number of States have mandated that insurers 
cover preventive services. Fifteen States require cov¬ 
erage of mammograms; seven mandate preventive 
services for children and infants. Diabetic education is 
required in four States and Pap smears in two. One 
State mandates coverage of prenatal care. However, 
these mandates apply to employer health benefit plans 
only if the employer purchases a policy from a State- 
licensed insurer. An employer that self-insures, covers 
employees’ health costs directly instead of through an 
insurance policy, is exempt from State mandates 
under the Employee Retirement Income Security Act 
of 1974 (ERISA). As of 1984, more than 50 percent 
of all employees with health insurance were in self-in¬ 
sured plans that were exempt from State mandates. 26 


Federal Health Programs 

Medicare—Medicare law specifically excludes cov¬ 
erage of preventive services, with a few' exceptions. 
Influenza vaccine and pneumococcal vaccine are cov¬ 
ered; vaccine for hepatitis B is covered for persons at 
high or intermediate risk of contracting the disease. 
The Omnibus Budget Reconciliation Act of 1989 
(P.L. 101-239) added coverage of Pap smears, effec¬ 
tive July 1990. Beneficiaries may receive a Pap smear 
every 3 years, or more often for persons determined 
to be at high risk for cervical cancer. Coverage of 
screening mammography was included in the Medi¬ 
care Catastrophic Coverage Act of 1988 (P.L. 100- 
360), but was subsequently repealed. 

As in the case of private insurance, beneficiaries 
who choose to enroll in HMOs may receive broader 
preventive service coverage. Of the 131 HMOs and 
competitive medical plans (CMPs) with Medicare risk 
contracts in December 1989, 82 percent offered rou¬ 
tine physicals, 76 percent covered immunizations 
beyond those covered under Medicare, and 62 per¬ 
cent provided health education. 27 

The Consolidated Omnibus Budget Reconciliation 
Act of 1985 (P.L. 99-272) required the Secretary to 
conduct at least five 4-year demonstration projects to 
determine the costs and effectiveness of providing 
preventive health services to Medicare beneficiaries. 
Six such projects are currently under way in Raleigh- 
Durham, Seattle, San Diego, Los Angeles, Baltimore, 
and Pittsburgh. Randomly selected patients are placed 
into either experimental or control groups. The con¬ 
trol group patients receive their usual care, while 


28 Patricia McDonnell, et al., “Self-Insured Health Plans,” Health Care Fi¬ 
nancing Review, 8 (2) (Winter 1986): 1-16. 

27 Health Care Financing Administration, Office of Prepaid Health Care, 
Monthly Report: Medicare Prepaid Health Plans (December 1989). 


72 




individuals in the experimental groups receive screen¬ 
ing, immunization and counseling services. Scheduled 
to end early in 1991, the projects will have collected 
data for about 2 years. One of the potential limitations 
of the demonstrations is that the full effects of preven¬ 
tive care on costs and outcomes may not be measura¬ 
ble over the relatively short life of the projects. 

Medicaid—Medicaid is a Federal-State matching 
program providing medical assistance to low income 
persons who are aged, blind, disabled, or members of 
families with children. Each State designs and admin¬ 
isters its own Medicaid program, setting eligibility 
and coverage standards within broad Federal guide¬ 
lines. States are required to cover preventive services 
for children and are permitted to cover such services 
for adults. 

For beneficiaries under age 21, all States must pro¬ 
vide Early and Periodic Screening, Diagnosis, and 
Treatment (EPSDT) services. Services include peri¬ 
odic health examinations, vision, hearing, and dental 
examinations and treatment or correction of problems 
noted, as well as immunizations and health education. 
In the year ended June 30, 1989, 32 percent of the 9.8 
million Medicaid beneficiaries under age 21 received 
initial or periodic examinations under EPSDT. (An¬ 
other 10 percent of these beneficiaries were enrolled 
in HMOs or other “continuing care arrangements”; 
utilization figures for this segment are not available.) 

Coverage of preventive services for adults is op¬ 
tional under Medicaid law; only coverage of prenatal 
care is mandatory. As of 1987, 21 States included pre¬ 
ventive services in their Medicaid plans. No further 
information is available about the exact nature of the 
services provided. 

Other Federal Programs—In addition to Medicare 
and Medicaid, a variety of Federal programs provide 
funding for preventive health initiatives by State and 
local governments or private entities. Some of these 
programs include funding for actual delivery of pre¬ 
ventive services. The most important of these pro¬ 
grams are as follows: 

• The Preventive Health and Health Services 
Block Grant authorized by the Public Health 
Service Act provides grants to States for preven¬ 
tive health services, including programs to detect 
and prevent hypertension, immunization services, 
serum cholesterol control projects, and screening 
for uterine and breast cancer. 

• The Maternal and Child Health Block Grant au¬ 
thorized by Title V of the Social Security Act 
provides grants to States for a variety of health 
programs, including direct provision of preven¬ 


tive and primary care services to mothers and 
children, health screening, immunizations, and 
screening of newborns for sickle cell anemia and 
other genetic disorders. 

• The Centers for Disease Control (CDC) immuni¬ 
zation program provides grants to State and local 
health agencies for operation of childhood immu¬ 
nization programs. 

• Other CDC programs fund screening and other 
preventive services targeted at specific diseases, 
including AIDS, diabetes, lead poisoning, sexu¬ 
ally transmitted diseases, and tuberculosis. 

There are also Federal programs that support certain 
facilities in providing general medical care, including 
preventive services, to target populations. Among 
these programs are grants to community and migrant 
health centers, which provide services to low-income 
populations in underserved areas, and the Indian 
Health Service, which provides or purchases services 
for certain groups of Indians. 


EVALUATING PREVENTIVE SERVICES 

Evaluating preventive services involves determin¬ 
ing the benefits, risks and costs of an intervention and 
comparing them to the benefits, risks and costs of an 
alternative. The alternative may be another form of 
intervention, or the alternative may be to do nothing 
and let nature take its course. 

The benefits of prevention are reflected in reduced 
mortality and improved quality of life. Of course, im¬ 
proved health, or any savings from averted costs of 
treatment, does not occur for every person who re¬ 
ceives a preventive intervention but only for those 
who would have been afflicted with the target condi¬ 
tion in the absence of the intervention. (Others, may, 
however, have greater peace of mind as a result of 
preventive services.) For society, the benefits appear 
in lower incidence of illness and in improved health 
status indicators. 

The risks of prevention include the risks from the 
intervention itself, such as the risk of vaccine injury 
or radiation-induced cancer, or risk of misdiagnosis 
from a false-positive examination result. These risks 
are balanced against the risk of contracting the disease 
the intervention is designed to prevent. 

The costs of prevention include the resource costs 
of the intervention and the costs of treating any com¬ 
plications from the intervention. 


73 


The following discussion reviews the available evi¬ 
dence on the benefits, risks and costs of the most 
frequently delivered or recommended preventive 
services. Recommendations for preventive services 
are issued by professional and scientific associations, 
voluntary associations, medical specialty organiza¬ 
tions, governmental agencies and by individual profes¬ 
sionals. The recommendations do not always agree 
and may even be contradictory. Differences occur be¬ 
cause of the lack of good evidence of the effective¬ 
ness of preventive services and because of the diverse 
interpretations different groups give to the evidence 
that is available. There is a lack of research directly 
linking interventions to outcomes. Even where re¬ 
search is available, different interpretations may be 
used to derive recommendations for what services 
should be provided to whom. 

The U.S. Preventive Services Task Force 
(USPSTF) uses explicitly structured criteria for link¬ 
ing evidence to recommendations and has established 
rules of evidence that are applied to each topic 
studied. Task Force recommendations rely on re¬ 
search documenting the efficacy and effectiveness of 
the intervention. 28 

Incidence and mortality data and the recommenda¬ 
tions included in the following were compiled by the 
Office of Technology Assessment and the United 
States Preventive Services Task Force. 


Periodic Health Examinations 

Historically, it has been recommended that every¬ 
one have a complete annual physical examination. 
The annual physical included a nearly identical bat¬ 
tery of tests to each patient each year. The value of 
the annual physical has been questioned in recent 
years due to concerns about the efficiency and health 
benefits of performing the same procedures on each 
patient on a scheduled basis. Governmental agencies 
and professional societies have established or are de¬ 
veloping recommendations either about periodic 
health examinations or about specific preventive serv¬ 
ices that require a physician visit. The frequency and 
content of periodic health examinations are deter¬ 
mined by the patient’s age, sex and medical history. 
Health improvement that results from the periodic ex¬ 
amination alone, is undetermined. 


28 Robert S. Lawrence, “Preface to: U.S. Preventive Services Task 
Force,” Guide to Clinical Preventive Services, Prepublication Copy (1989). 


Prenatal Care 

Prenatal care encompasses a range of preventive, 
diagnostic and therapeutic services delivered with the 
goal of improving birth outcomes and the health of 
the mother. A large body of evidence supports the 
effectiveness of early and frequent prenatal care on 
reducing low birth weight and infant mortality. The 
costs of prenatal care are most often compared to the 
costs of initial intensive care and rehospitalization for 
the low birth weight baby. The Office of Technology 
Assessment has estimated savings of $14,000 to 
$30,000 for each low birth weight birth averted. 29 

Controversy and uncertainty about prenatal care do 
not center around whether prenatal care is effective 
overall, but around timing and frequency of clinic 
visits and effectiveness of the components of prenatal 
care. Several studies have demonstrated that women 
at high risk for poor birth outcomes benefit more 
from prenatal care than women at average risk. 30 A 
panel convened by PHS reportedly recommended 
reductions in the numbers of visits and procedures 
delivered to pregnant women at moderate and low 
risk, and a redirection of resources to higher risk 
mothers. 31 


Well-Child Care 

The main aspects of well-child care are immuniza¬ 
tion (discussed in the next section) and health supervi¬ 
sion. Immunizations aside, there is little evidence of 
the effectiveness of well-child care. Mortality is not 
an appropriate outcome measure for children, and 
studies of morbidity and development have not been 
able to demonstrate that health supervision has any 
impact. Also, there are questions of whether good 
health in children is influenced more by medical care 
or by social and economic factors. Health supervision 
may have more impact on the health and develop¬ 
ment of a child at risk because of social and economic 
factors than on the health of the child at low risk. In 
any case, expert opinion advocates regular health care 
for children and parents may find it reassuring. 
This is an example of a preventive service that is 
intuitively valued, but for which definitive research is 
still lacking. 32 


29 Office of Technology Assessment, Healthy Children, 85. 

30 Committee to Study the Prevention of Low Birth weight, Division of 
Health Promotion and Disease Prevention, Institute of Medicine, Preventing 
Low Birthweight: Summary (Washington, D.C.: 1985), 21. 

31 Janice Perrone, “PHS Panel Recommends Changes in Prenatal Care,” 
American Medical News (October 13, 1989). 

32 Office of Technology Assessment, Healthy Children, chap. 6. 


74 




Immunizations 

Immunization is considered a safe, effective and 
cost-effective method of controlling many communi¬ 
cable diseases. 33 However, it is not without risk. 
Yearly, a small number of people suffer serious injury 
or death from reactions to vaccines. 34 When an entire 
population is at risk of harm from a disease, risk from 
the preventive measure seems minimal. Thus, all chil¬ 
dren are immunized against the childhood diseases. 
However, when the risk of disease is very low, risk 
of injury from vaccine assumes a greater importance. 
Selecting the population appropriate to receive the 
preventive measure helps to balance the risks. Thus, 
influenza vaccine is targeted to the medically high 
risk population for whom a mild case of flu can be 
life-threatening. When it is difficult to estimate which 
carries the greater risk, the intervention or the dis¬ 
ease, decisions to promote, provide, or accept a vac¬ 
cine may be made on the basis of personal values. 

Children in the U.S. are routinely immunized 
against diphtheria, tetanus, pertussis (whooping 
cough), poliomyelitis, measles, mumps and rubella 
(German measles), and recently, haemophilus 
influenzae b (Hib). Vaccines against diphtheria, teta¬ 
nus, and pertussis are administered in a single shot 
(DTP). Similarly, vaccines against measles, mumps 
and rubella are administered as the single MMR. 
Polio vaccinations are administered orally and are 
commonly referred to as OPV. The relatively new 
Hib protects against the Hib infection which is the 
leading cause of bacterial meningitis. The vaccines 
provide both health benefits and cost savings. 35, 36 

For adults, the Centers for Disease Control, the 
American College of Physicians and the USPSTF 
recommend pneumococcal and influenza vaccines for 
persons over age 65. Hepatitis B vaccine is recom¬ 
mended by CDC and the USPSTF for intravenous 
drug users and others at special risk. Tetanus-diphthe¬ 
ria boosters are recommended for all adults every 10 
years. 


33 U.S. Department of Health and Human Services, Fiscal Year 1990 Justi¬ 
fication of Appropriation Estimates for Committee on Appropriations, (2) (Wash¬ 
ington, D.C.: 1989), 61. (Hereafter cited as U.S. Department of Health and 
Human Services, Appropriation Estimates.) 

34 U.S. Congress, House Committee on Energy and Commerce, National 
Childhood Vaccine Injury Act of 1986, House Report No. 99-908, 99th Cong., 
2d sess., part 1 (Washington, D.C.: Government Printing Office, 1986). 

35 U.S. Congress, Office of Technology Assessment, Healthy Children: In¬ 
vesting in the Future (Washington. D.C.: Government Printing Office, 1988), 
135. 

38 U.S. Department of Health and Human Services, Appropriation Esti¬ 
mates, (2): 60-61. 


Screening 

If a screening procedure is to result in an improved 
outcome relative to conventional diagnosis after 
symptoms are present, the procedure should accu¬ 
rately detect an early stage of disease sooner than it 
could be detected without the screening examination 
and there should be an effective therapy available for 
treating the condition. The benefits of early detection 
are questionable if the condition that is the target of 
the screening is not treatable. 

The ultimate benefits of early detection depend not 
only on the availability of treatment, but also on the 
patient’s willingness to enter into and maintain the 
course of treatment which may entail substantial 
changes to lifestyle. An individual who, before 
screening, had no signs or symptoms of illness, may 
be reluctant to adhere to a difficult and costly regi¬ 
men that offers the uncertain possibility of avoiding 
illness many years in the future. 

There are some screening procedures which au¬ 
thorities agree should be performed on everyone even 
though they may not agree on the target population, 
the frequency with which the procedure should be 
performed or on the threshold for initiating treatment. 
There is general agreement on screening for hyperten¬ 
sion or high blood pressure, for high blood choles¬ 
terol, and on performing Pap smears, clinical breast 
examinations and mammograms. Some tests not rec¬ 
ommended for the general population may be recom¬ 
mended for persons who have no symptoms but who 
have been determined to be at high risk for the target 
condition because of medical history or some other 
reason. As these cases are generally left to the physi¬ 
cian’s discretion, the following discussions refer to 
persons at average risk. 

Routine newborn screenings include those for 
phenylketonuria (PKU) and hypothyroidism, prob¬ 
lems which can cause irreversible severe mental retar¬ 
dation if they are not treated or not treated early 
enough in an infant’s development. Some States re¬ 
quire screening for other metabolic diseases which 
have serious adverse consequences. While early diag¬ 
nosis may be useful to some infants and their families, 
in some cases, there is no treatment for the target 
condition, or the benefits of early treatment are not 
known. When tests are performed for PKU and 
hypothyroidism only, savings amount to about 
$93,000 for each case found and treated. 37 Additional 
tests may require collecting additional specimens at 
substantially higher cost. 

37 Office of Technology Assessment, Healthy Children, 106. 


75 




Hypertension, a leading factor in coronary artery 
disease, congestive heart failure and stroke, may affect 
as many as 58 million Americans. 38 The benefits of 
controlling hypertension have been well established 
with the greatest effects seen in reductions of 
cerebrovascular disease and deaths due to stroke. The 
American Academy of Pediatrics and the National 
Heart, Lung and Blood Institute recommend annual 
testing for persons 3 to 20 years old; they recommend 
tests every 2 years for adults not previously identified 
as having high blood pressure. Because the procedure 
can be performed simply during the course of a medi¬ 
cal visit, it is reasonable to expect that no additional 
charge would be incurred. 

High blood cholesterol is a major risk factor in coro¬ 
nary heart disease in men. The benefit of lowering 
cholesterol in women and the elderly has not been es¬ 
tablished. However, these groups account for a large 
portion of the population where a small benefit to 
large numbers may have a significant public health 
impact. The National Heart, Lung and Blood Institute 
recommends measurement of blood cholesterol in all 
adults at least every 5 years although the USPSTF 
leaves testing to the physician’s discretion. 

Pap smear is the principal screening test for cancer 
of the cervix. Each year, there are about 13,000 new 
cases and 7,000 deaths from cervical cancer in the 
U.S. Both figures represent decreases due in part to 
early detection and treatment. The appropriate fre¬ 
quency and ages for Pap test screening are controver¬ 
sial. With frequent testing, lesions that could be 
precancerous are less likely to escape detection. How¬ 
ever, there may be a diminishing return with increas¬ 
ing frequency. The American Cancer Society, the 
National Cancer Institute, the American College of 
Obstetricians and Gynecologists, the American Medi¬ 
cal Association, the American Nurses Association, the 
American Academy of Family Physicians and the 
American Medical Women’s Association recommend 
annual Pap smears for all women who are or have 
been sexually active or have reached age 18. After 3 
normal annual smears, the recommendations allow for 
less frequent testing at the discretion of a physician. 
The National Institutes of Health recommends Pap 
testing be discontinued after age 60 if previous smears 
have been consistently negative. The USPSTF recom¬ 
mends Pap smears be repeated every 1 to 3 years at 
the physician’s discretion and discontinued at age 65 if 
previous smears have been consistently normal. 

Breast self-examination (BSE) along with clinical 
breast examination and mammography are the three 


38 U.S. Preventive Services Task Force, Guide to Clinical Preventive Serv¬ 
ices, Prepublication copy (May 1989). (Hereafter cited as U.S. Preventive 
Services, Clinical Preventive Services.) 


screening techniques used to detect breast cancer, the 
leading cause of cancer deaths among women. Breast 
cancer accounts for over 140,000 new cases and over 
40,000 deaths in the U.S. each year. The effectiveness 
of self-examination on mortality is not clear; the effec¬ 
tiveness of clinical breast exams and mammography 
has been demonstrated in reducing mortality among 
women age 50 and over. 39, 40 However, there is un¬ 
certainty about the benefits of mammographies for 
women ages 40 to 49. 41 Most authorities recommend 
or support monthly BSE, regular clinical examination, 
baseline mammography between ages 35 and 40 fol¬ 
lowed by annual or biennial mammograms from ages 
40 to 49, and annual mammograms beginning at age 
50. The American College of Physicians recommends 
annual clinical breast examinations starting at age 40 
and annual mammograms beginning at age 50. The 
USPSTF limits recommendations for mammography 
to every 1 to 2 years for women ages 50 to 75. 

Fecal occult blood testing (FOBT) and sigmoidoscopy 
are used to screen for colorectal cancer, the second 
most common form of cancer in the U.S. With the 
second highest mortality rate from cancer, colorectal 
cancer accounts for 150,000 new cases and 61,000 
deaths per year. In addition, the condition and treat¬ 
ment can produce considerable discomfort and 
suffering. 

Sigmoidoscopic tests use rigid or flexible instru¬ 
ments that enable the examiner to look into the 
rectum. These examinations may detect polyps, 5 to 
40 percent of which may become cancerous over a 
period of 10 to 15 years. In persons with no symp¬ 
toms, 1 to 4 cancers may be detected for every 1,000 
sigmoidoscopic examinations. At $100 to $200, the 
sigmoidoscopic examination is relatively expensive, 
with the cost of screening all adults over age 50 esti¬ 
mated at $1 billion per year. Risks include possible 
perforation of the bowel in addition to the danger of 
false-positives. 

While some studies in which screening was a factor 
show reduced mortality from colorectal cancer, firm 
evidence that screening prevents morbidity and mor¬ 
tality from colorectal cancer is not available. The 
American Cancer Society, the National Cancer Insti¬ 
tute, the American Gastroenterological Association, 
and the American Society for Gastrointestinal Endos¬ 
copy recommend annual FOBT and sigmoidoscopy 


39 Makuc, American Journal, 21-26. 

40 David M. Eddy, et al., “The Value of Mammography Screening in 
Women Under Age 50 Years,” Journal of the American Medical Association, 
259 (10) (March 11, 1988): 1512-1519. 

41 David Eddy, et al., reviewed several studies and concluded that annual 
screening for 25 percent of the women in this age group would reduce deaths 
from breast cancer in the U.S. from 10,700 to 10,327 in the year 2000 at a 
cost of over $400 million. 


76 




every 3 to 5 years beginning at age 50. The USPSTF 
reports that some experts advise against sig¬ 
moidoscopy but recommend FOBT every 2 years be¬ 
tween ages 40 and 50 and annually thereafter. The 
USPSTF finds insufficient evidence to recommend for 
or against either screening procedure but states there 
are no grounds for discontinuing the practices where 
they are currently used. 


Health Education and Counseling 

The chronic degenerative diseases that are now the 
leading causes of death in the United States—heart 
disease, cancer and stroke—are related to risk factors 
that can be reduced by addressing personal behaviors. 
In counseling interventions, the patient receives life¬ 
style counseling related to altering risk factors. Coun¬ 
seling can vary from simple information and advice 
given by minimally trained personnel to multiple tech¬ 
niques used by both physicians and non-physicians. 


Most of the research on health education and coun¬ 
seling has been in the area of smoking cessation where 
methods ranged from simple brief messages from phy¬ 
sicians to combinations of printed materials, video 
tapes and ongoing counseling with follow-up contact. 
The studies report that from 2 percent to 10 percent 
of the participants stopped smoking, although some 
report much higher numbers immediately following 
the intervention. 42 

With a large body of evidence linking tobacco use 
to the cardiovascular, pulmonary and cancerous con¬ 
ditions associated with significant morbidity and mor¬ 
tality, the public health impact of eliminating this risk 
factor for even a small number of people could be sig¬ 
nificant. A 1 percent reduction in the number of 
deaths from a disease that accounts for 100,000 deaths 
per year adds many more years of healthy life than a 
50 percent reduction in deaths from a disease that 
causes 1,000 deaths per year. 


42 Aaron R. Folsom and Richard H. Grimm, Jr., “Stop Smoking Advice 
by Physicians: A Feasible Approach?” American Journal of Public Health, 77 
(7): 849-850; U.S. Preventive Services, Clinical Preventive Services, 193-197. 


77 




















































































































HEALTH BENEFITS FOR TREATMENT SERVICES 
FOR SUBSTANCE ABUSE AND MENTAL ILLNESS 


Edward Klebe * 


In response to your request, we have prepared the 
following memorandum on the design of a benefit 
package for substance abuse and mental health treat¬ 
ment services. The paper begins with background in¬ 
formation on the populations at risk, with estimates of 
the numbers of persons abusing alcohol and illegal 
drugs and the numbers of persons with mental illness 
as reported by the Alcohol, Drug Abuse, and Mental 
Health Administration (ADAMHA) of the Depart¬ 
ment of Health and Human Services (HHS). The 
opening section also includes estimates of the costs to 
society of substance abuse and mental illness, as re¬ 
ported by ADAMHA. The second section of the 
report describes the types of treatment modalities for 
substance abuse and mental illness currently in use, as 
well as the results of research into the effectiveness 
and cost-effectiveness of the various treatment modali¬ 
ties. The third section of the paper describes Federal 
programs for substance abuse and mental health treat¬ 
ment services, under the Alcohol, Drug Abuse, and 
Mental Health Block Grant, and the Department of 
Veterans Affairs (VA). The fourth section describes 
existing public and private insurance coverage for 
substance abuse and mental health treatment. This 
part includes information on Medicare and Medicaid 
coverage for substance abuse and mental health treat¬ 
ment services, as well as State laws mandating health 
insurance coverage for such treatment, and employer- 
based health insurance coverage, including coverage 
under the Federal Employee Health Benefits Program 
(FEHB). The final part of the paper discusses issues in 
considering a benefits package for substance abuse 
and mental health treatment. 


* Memorandum prepared by Edward Klebe, Specialist in Social Legisla¬ 
tion, Education and Public Welfare Division, Congressional Research Serv¬ 
ice, January 26, 1990. 


BACKGROUND 

The Population at Risk 

Substance Abuse Population—Estimates of the 
extent of drug and alcohol abuse in the United States 
vary, but it seems clear that millions of persons in this 
country abuse such substances each year to varying 
degrees. In addition, although substance abuse trends 
in recent years appear to be on the decline, the fact 
remains that a significant proportion of our population 
are using illicit drugs and alcohol to excess and make 
up a substantial population at risk for treatment and 
rehabilitation services. 

ADAMHA finances and publishes several national 
surveys that measure the extent of substance abuse in 
the United States. The 1988 National Household 
Survey on Drug Abuse, for instance, is the ninth in a 
series of national surveys first carried out in 1971 to 
measure the prevalence of drug use among the Ameri¬ 
can household population aged 12 and over. The 1988 
National Household Survey found that 7.3 percent of 
the household population age 12 and over (14.5 mil¬ 
lion persons) were “current” users of such illicit drugs 
as marijuana, cocaine, and others, i.e., they admitted 
to using such drugs in the 30 days before the survey 
was conducted. This was a decrease in 37 percent 
from the 23 million current users in the 1985 study. 
Users of any illicit drug “within the last year” de¬ 
clined from 37 million in 1985 to 28 million in 1988 
(14.1 percent of the population group), a drop of 
almost 25 percent. The number of “current” users of 
cocaine fell by 50 percent, from 5.8 million in 1985 to 
2.9 million (1.5 percent of the population group) in 
1988, and those who used cocaine “within the past 
year” fell by a third, from 12 million to 8 million (4.1 
percent of the population group). 


79 



The Household Survey reports that 106 million per¬ 
sons, 53.4 percent of the household population, were 
current drinkers of alcohol in 1988, down from 113 
million in 1985. The household population age 35 and 
over is the largest group of current alcohol users, at 
nearly 57 million (51.3 percent of the group), but 25.2 
percent of those in the 12-17 age group (5 million 
persons) report drinking alcohol beverages in the 30 
days prior to the survey. 1 

In addition to the information on alcohol use con¬ 
tained in the Household Survey, the National Institute 
on Alcohol Abuse and Alcoholism of ADAMHA es¬ 
timates that 18 million adults 18 years old and older 
currently experience problems as a result of alcohol 
use. The problems may include such symptoms of de¬ 
pendence as loss of memory, inability to stop drinking 
until intoxication, inability to cut down on drinking, 
binge drinking, and withdrawal symptoms. 

ADAMHA also sponsors a nationwide survey of 
young people entitled Monitoring the Future: A Con¬ 
tinuing Study of the Lifestyles and Values of Youth. 
Better known as the High School Senior Survey, it 
has reported, annually since 1975, on the drug use and 
related attitudes of a representative national sample of 
high school seniors. The 1988 High School Senior 
Survey shows decreases in alcohol and drug use simi¬ 
lar to those reported by the Household Survey. Use 
of marijuana, the illicit drug most frequently used by 
high school seniors, has declined markedly over the 
past decade. In 1979, half of all seniors reported some 
marijuana use in the year prior to the survey; in 1988, 
only one-third reported such use. In 1979, 36.5 per¬ 
cent of all high school seniors reported marijuana use 
in the prior 30 days; by 1988, only 18 percent re¬ 
ported marijuana use in the previous month. Similar 
trends were reported for other drug use—use of co¬ 
caine in the 30 days prior to the survey fell from a 
peak of 6.7 percent in 1985 to 3.4 percent in 1988. Use 
of alcohol also declined among this population, al¬ 
though alcohol use remains high. Nearly 64 percent 
of the class of 1988 reported using alcohol in the pre¬ 
vious 30 days; 34.7 percent reported having five 
drinks or more in a row in the last 2 weeks before the 
survey. 2 

These surveys have certain limitations in measuring 
national alcohol and drug use in that they leave out 
populations some of whom could represent extensive 
drug and alcohol use. The National Household 


1 U.S. Department of Health and Human Services, National Institute on 
Drug Abuse, of the Alcohol, Drug Abuse, and Mental Health Administra¬ 
tion. National Household Survey on Drug Abuse: 1988 Population Estimates, 
1989. 

2 U.S. Department of Health and Human Services, Alcohol, Drug Abuse, 
and Mental Health Administration, Drug Use, Drinking, and Smoking: Na¬ 
tional Survey Results from High School. College, and Young Adults Populations, 

1975-1988, 1989. 


Survey, for instance, includes no information on alco¬ 
hol and drug use by persons not living in households, 
such as the homeless, military personnel living on 
base, and those in dormitories, hospitals, and jails. 
The High School Senior Survey includes no informa¬ 
tion on the alcohol and drug use of the dropout popu¬ 
lation of the high school senior age group. Despite 
these limitations, the various national surveys of alco¬ 
hol and drug use are helpful in examining current 
trends in such use. 

Mentally Ill Population—The chronically mentally 
ill population encompasses persons both in institutions 
and in the community who suffer certain mental or 
emotional disorders (organic brain syndrome, schizo¬ 
phrenia, recurrent depressive and manic-depressive 
disorders, paranoid and other psychoses, plus other 
disorders that may become chronic) that erode or pre¬ 
vent the development of their functional capacities in 
relation to such primary aspects of daily life as per¬ 
sonal hygiene and self-care, self-direction, interper¬ 
sonal relationships, social transactions, learning, and 
recreation, and that erode or prevent the development 
of their economic self-sufficiency. 

In addition to the severely or chronically mentally 
ill, there is a substantial population of persons who, 
from time to time during their lives, suffer from less 
severe mental disorders or upsets in their everyday 
lives. While the diagnosis for such disorders may not 
qualify as clinical mental illnesses, they may cause suf¬ 
ficient upset in the life of the individual to require 
some short-term treatment from some facet of the 
health care sector, whether in the form of psychiatric 
or psychological care, marital counseling, or other 
counseling. 

Opinions vary on the number of mentally ill per¬ 
sons in the U.S., with estimates ranging from 1 per¬ 
cent to 5 percent of the general population with 
severe mental disorders. National Institute of Mental 
Health (NIMH) estimates that the number of chron¬ 
ically mentally ill in the United States ranges from 1.7 
million to 2.2 million, including 900,000 who are re¬ 
ceiving residential services in a variety of institutional 
settings, including nursing homes, public and private 
mental or psychiatric hospitals, Department of Vet¬ 
eran Affairs facilities, residential treatment centers, or 
community mental health centers. 3 Less information 
is available on the prevalence of less severe mental 
disorders. ADAMHA estimated in 1980 that 10 to 15 
percent of the adult population of the U.S. suffered 
from all types of mental disorders, including severe 


3 U.S. Department of Health and Human Services, National Institute of 
Mental Health, Alcohol, Drug Abuse, and Mental Health Administration, 
Mental Health, United States, 1987. [Hereafter cited as Mental Health, United 
States, 1987.] 


80 




and chronic disorders such as depression and affective 
disorders, schizophrenia, alcohol and drug problems, 
and anxiety, phobia, and other neuroses. 


The Cost to Society of Substance 
Abuse and Mental Illness 

In 1981, the Research Triangle Institute prepared a 
report for ADAMHA on the costs to U.S. society in 
1977 of alcoholism, drug abuse, and mental illness. 
The report divided total costs to society between 
“core costs” and “other related costs.” “Core costs” 
were costs that are borne by the health care system or 
are indirectly related through reduced productivity as 
a result of premature mortality or excessive morbid¬ 
ity. “Other related costs” include the costs of social 
programs other than health programs, in addition to 
accident costs, and costs of incarceration. 

The 1981 report estimated that the combined eco¬ 
nomic costs of alcohol, drug abuse, and mental illness 
in 1977 was $106 billion—$49.4 billion for alcoholism, 
$16.4 billion for drug abuse, and $40.3 billion for 
mental illness. These cost estimates were updated for 
1980 at a total of $190.7 billion—$89.5 billion for al¬ 
cohol abuse, $46.9 billion for drug abuse, and $54.2 
for mental illness, and again in 1983 at a total of $249 
billion—$116.7 billion for drug abuse, $59.7 billion for 
drug abuse, and $72.8 billion for mental illness. 
ADAMHA has contracted with the University of 
California, San Francisco to prepare new estimates of 
the economic costs to society from substance 
abuse and mental illness; the results are expected 
momentarily. 


TREATMENT FOR SUBSTANCE 
ABUSE AND MENTAL ILLNESS 

Substance Abuse Treatment 

Treatment services for alcohol and drug abuse are 
provided in a variety of settings and modalities. Some 
forms of treatment are aimed at drug abusers only, 
such as in the case of methadone maintenance for 
heroin addicts, others for alcohol abuse only, such as 
treatment involving the use of the sensitizing drug 
disulfiram (Antabuse). Aside from such exceptions, 
however, similar modalities of treatment are used for 
both alcohol or drug abuse, and often in the same set¬ 
ting. Such treatment often starts with a short-term 
program of detoxification, which can be provided on 
an inpatient basis in a hospital or other residential fa¬ 
cility or in an outpatient program. Although many 


substance abusers do not receive any treatment serv¬ 
ices beyond it, detoxification is not a treatment for the 
substance abuse dependence as such, but is used, most 
often with alcohol abuse and heroin addiction, to 
clear the client’s system of the physical remnants of 
the drug or alcohol. For those who choose to pro¬ 
ceed to further care following detoxification, a variety 
of program modalities are available to prevent relapse 
and help clients remain alcohol- or drug-free. 

Treatment can be provided on an inpatient basis, in 
such settings as detoxification and rehabilitation units 
in general hospitals, treatment units in public and pri¬ 
vate psychiatric hospitals, and free-standing treatment 
facilities. Substance abuse treatment can also be pro¬ 
vided in an outpatient setting, in the office of a 
private physician or other treatment professional, in 
treatment units of community facilities such as com¬ 
munity mental health center or hospital, or in free¬ 
standing outpatient substance abuse treatment 
facilities. 

Treatment modalities in inpatient and outpatient set¬ 
tings include medical approaches, psychological 
approaches, and social-cultural approaches, or a com¬ 
bination of them, in providing care. The medical 
approach uses medications such as antidepressants, 
sensitizing agents such as disulfiram, and other medi¬ 
cations to assist the patient in remaining drug-free. 
Psychological approaches to treatment use aversion 
therapy and other behavioral and nonbehavioral tech¬ 
niques. Social-cultural approaches to treatment focus 
on changing the social environment in which the drug 
or alcohol abuser functions. An example of this is 
the approach used by such groups as Alcoholics 
Anonymous and Narcotics Anonymous, which try to 
establish a whole new culture for the alcoholic or 
drug addict. It is not at all unusual for a drug or alco¬ 
hol abuser to go through many different types and 
settings of treatment before achieving long-term suc¬ 
cess in becoming alcohol- or drug-free. 

Most treatment for drug abuse in recent years has 
focused on three different modalities of treatment— 
methadone maintenance for opiate addiction, and 
therapeutic communities and outpatient drug-free pro¬ 
grams for all types of drug abuse. Methadone mainte¬ 
nance is a treatment, usually outpatient, designed to 
help persons addicted to heroin and other opium-de¬ 
rivative drugs. It combines the daily administration of 
methadone, a synthetic opiate product that is adminis¬ 
tered orally and controls the craving for heroin in the 
addict, with intensive counseling and other social and 
medical services. 

The residential drug-free program approach, in¬ 
cludes the therapeutic community approach, the 


81 


model for which was the Synanon program in Cali¬ 
fornia in the late 1950s. Therapeutic communities are 
full-time, drug-free residential programs which pro¬ 
vide a highly-structured, nonpermissive program of 
treatment. Therapy in a therapeutic community is 
generally a long-term proposition, often extending 
beyond a year in duration. Treatment features peer 
support and confrontation, individual and group coun¬ 
seling, and educational and job training when 
appropriate. 

Outpatient drug-free programs vary widely in dura¬ 
tion, goals, and content, but have in common that 
they do not use medication in treatment, they use 
counseling as the major form of therapy, and as out¬ 
patient programs they allow clients to live at home 
during the course of treatment. These outpatient pro¬ 
grams began as a response to a need for community- 
based crisis centers for addicts. Many outpatient 
programs operate largely as drop-in “crisis” centers, 
while others are more structured. As with the thera¬ 
peutic community, outpatient drug-free programs 
make extensive use of former addicts as staff coun¬ 
selors and therapists. 

The National Association of State Alcohol and 
Drug Abuse Directors (NAS AD AD) has for the past 
3 years, under contract to the National Institute on 
Alcohol Abuse and Alcoholism (NIAAA) and the 
National Institute on Drug Abuse (NIDA) of 
ADAMHA, compiled and published fiscal, client, and 
other service data related to substance abuse treat¬ 
ment activities in the States. These data apply to only 
those treatment units and programs in the States “that 
received at least some funds administered by the State 
Alcohol/Drug Agency.” 

In FY 1988, the most recent year for which data 
are published, the NASADAD study reported on 
6,926 alcohol and/or drug treatment units which re¬ 
ceived funds administered by State alcohol and drug 
abuse agencies. Of the total, 1,806 were identified as 
alcohol units, 1,614 as drug units, and the remaining 
3,506 as combined alcohol/drug units. These units in 
FY 1988 reported 1.2 million admissions for alcohol¬ 
ism and alcohol abuse treatment and 518,000 for drug 
abuse and dependency treatment. 

Of the admissions for alcoholism and alcohol abuse 
treatment, 392,000 were for detoxification (79,000 in a 
hospital setting and 313,000 in a nonhospital setting), 
182,000 were for longer term rehabilitation or residen¬ 
tial care (19,000 in a hospital setting and 163,000 in 
nonhospital setting), and 549,000 were for outpatient 
care (33,000 in a hospital setting and 516,000 in a 
nonhospital setting). Of the more than half million ad¬ 
missions for drug treatment, nearly 96 thousand were 


for detoxification (13,000 in a hospital setting, 47,000 
in other residential settings, and 36,000 in an outpa¬ 
tient setting), 47,600 for methadone maintenance 
(nearly 46,000 in an outpatient program and 1,600 in a 
residential facility), and 357,000 in drug-free programs 
(7,800 in a hospital setting, 72,700 in a residential pro¬ 
gram, and 276,700 in an outpatient program). 4 


Mental Health Treatment 

Treatment for mental illness is also provided in a 
variety of settings, both inpatient and outpatient, in¬ 
cluding the following: 

A psychiatric hospital is a hospital (public or pri¬ 
vate) that is primarily concerned with providing in¬ 
patient care to mentally ill persons. 

A general hospital with separate psychiatric service 
is a licensed hospital that has established organiza¬ 
tionally separate psychiatric units with assigned 
staff for inpatient care and/or outpatient care and/ 
or partial hospitalization to provide diagnosis, eval¬ 
uation, and/or treatment to persons admitted with 
known or suspected psychiatric diagnoses. If inpa¬ 
tient care is provided in the separate psychiatric 
service, beds are set up and staffed specifically for 
psychiatric patients in a separate ward or unit. 
These beds may be located in a separate building, 
wing, ward, or floor, or they may be a specific 
group of beds physically separated from regular or 
surgical beds. 

A residential treatment center (RTQ for emotionally 
disturbed children is a facility that is designed and 
operated primarily to provide mental health treat¬ 
ment to children and youth. 

An outpatient mental health clinic is a facility that 
provides only ambulatory mental health services. 
The medical responsibility for all patients/clients 
and/or direction of the mental health program is 
generally assumed by a psychiatrist. 

A mental health partial care organization is a free¬ 
standing organization offering primarily day or 
night partial care. 

A multiservice mental health care organization is an 
organization that provides outpatient care and inpa¬ 
tient/residential treatment care in settings that are 
under the organization’s direct administrative con- 


4 National Association of State Alcohol and Drug Abuse Directors, Inc., 
State Resources and Services Related to Alcohol and Drug Abuse Problems, 
Fiscal Year 1988 (August 1989). 


82 



trol. A community mental health center (CMHC) 
may qualify as multiservice mental health organiza¬ 
tions for the purpose of this survey, if not part of a 
general or psychiatric hospital. 

Mental health treatment services are also provided 
in the private office practices of psychiatrists, psy¬ 
chologists, and other providers, and general hospitals 
that have no separate psychiatric services, but admit 
psychiatric patients to nonpsychiatric units. Clinical 
social workers, family therapists, marriage counselors, 
and other counselors also provide a substantial 
amount of what must be described as mental health 
care, particularly to those suffering from less severe 
mental illnesses or the everyday problems of life. In 
addition, a substantial number of persons, receive care 
for such disorders from primary care physicians. 
Some estimates, in fact, indicate that a majority of in¬ 
dividuals seeking care for a mental health disorder go 
to primary care physicians rather than to mental 
health specialists. The prevalence of mental illness 
among those seeking care in primary medical care 
settings has been estimated to range from 20 to 50 
percent. In any case, it is estimated “that millions of 
individuals depend for their emotional well-being 
upon the primary care physician’s sensitivity to emo¬ 
tional distress and willingness to accord it the same 
clinical significance as physical symptomatology.” 5 

The third edition of Mental Health, United States, 
published in 1987 by NIMH provides statistical data 
on mental health organizations providing care in the 
U.S. and the numbers of patients they serve. In 1984, 
according to this survey, there were 280 State and 
county mental hospitals, 221 private psychiatric hospi¬ 
tals, 1,347 general hospitals with psychiatric services, 
140 VA medical centers providing psychiatric care, 
325 RTCs for emotionally disturbed children, 798 
freestanding psychiatric outpatient clinics, 90 free¬ 
standing psychiatric partial care organizations, and 
1,263 multiservice mental health organizations. 

The average daily inpatient and residential treat¬ 
ment census for these facilities in the U.S. excluding 
territories for 1983 was 224,169 patients. Of this total, 
116,236 were in State and county mental hospitals, 
16,467 were in private psychiatric hospitals, 34,328 
were in general hospital psychiatric services, 20,342 
were in VA medical centers, 15,826 were in RTCs for 
children, and 20,970 were in multiservice mental 
health organizations. 

The survey does not include average daily census 
for outpatient and partial care organizations, but does 

5 Herbert C. Schulberg, and Ronald W. Manderscheid, "The Changing 
Network of Mental Health Service Delivery,” [In] The Future of Mental 
Health Services Research, NIMH, 1989, 20. 


include information on additions to such programs. 
Additions refer to patients admitted or readmitted to 
such settings or transferred from one such settings to 
another during a year. Each time a person is admitted 
or readmitted is counted separately, so there is some 
duplication of numbers, but the information is helpful 
in noting where outpatient services are provided. In 
1983, in the U.S. excluding the territories, there were 
nearly 2.7 million outpatient additions for treatment. 6 


Existing Knowledge on Effectiveness and 
Cost-Effectiveness of Modalities of Treatment 

Findings of research into the effectiveness of sub¬ 
stance abuse and mental health treatment can be de¬ 
scribed as inconclusive at best. Treatment research 
carried out over the past two decades on various 
treatment settings and modalities has found at least 
limited effectiveness for most if not all types and set¬ 
tings of treatment for alcohol and drug abuse and for 
mental illness. Most treatments, apparently, can be 
shown to be effective in detoxifying and preventing 
relapses in some alcohol and drug abusers some of 
the time. Similarly, research on the various types of 
treatment of mental illness has demonstrated limited 
success with many patients in reducing symptoms and 
returning the patient to productive life in the 
community. 

What treatment research thus far has been unable to 
do is to prove that any particular form of treatment is 
more effective than another, or to enable us to predict 
the most appropriate treatment for a specific patient 
at any particular time. 

Effectiveness of Alcoholism Treatment—In 1983, the 
U.S. Office of Technology Assessment (OTA) pub¬ 
lished a report, The Effectiveness and Costs of Alcohol¬ 
ism Treatment (prepared under contract by Saxe et al, 
Boston University) which focused on the costs of 
alcoholism and alcohol abuse to the health care 
system and to society in general. The OTA report, in 
assessing the effectiveness and cost-effectiveness of 
the various treatment settings and modalities for alco¬ 
holism based on a review of available treatment re¬ 
search, concluded that “treatment is better than no 
treatment, but that methodological problems render it 
difficult to conclude that any specific treatment is 
more effective than any other.” The report found 
consensus that inpatient treatment is far more ex¬ 
pensive than other treatment options, but found no 
evidence to demonstrate that inpatient care for 
alcoholism treatment offered greater likelihood of suc- 


6 Mental Health, United States, 1987. 


83 




cessful treatment than outpatient care. In assessing 
cost-effectiveness, the OTA review found “some evi¬ 
dence to support the hypothesis that alcoholism treat¬ 
ment is cost-beneficial” in that the benefits “seem to 
be in excess of the costs of providing such treatment.” 
The review, however, concluded that it was difficult 
from the evidence available at the time “to determine 
the relative effectiveness or cost-effectiveness of inpa¬ 
tient v. outpatient treatment.” 7 

The 1983 OTA report suggested that treatment re¬ 
imbursement strategies that encouraged early outpa¬ 
tient treatment and continuing aftercare services on a 
outpatient basis would lead to better use of resources. 
The report, however, did not recommend curtailing 
the use of hospital programs because it was felt that 
there was not a sufficient supply of non-hospital based 
treatment programs available at that time. 

In a 1988 study updating OTA’s 1983 review and 
findings, the principal author states that in not making 
such a recommendation, the “hope was that encour¬ 
agement of such alternatives would lead, over time, to 
a reduced utilization of hospitals.” The 1988 study 
concluded that the hoped-for reduction in the use of 
hospital-based treatment programs had not occurred; 
that, in fact, there had been an increase in the use of 
such treatment. (Between 1980 and 1986, the number 
of hospital-based inpatient addiction treatment pro¬ 
grams more than doubled, from 506 to 1,039, while 
outpatient programs increased only 13 percent, from 
1,182 to 1,342. 8 ) Further, the 1988 review confirmed 
the findings of the earlier report—that both inpatient 
and outpatient treatment have demonstrable effective¬ 
ness, but that there is “no evidence to suggest that in¬ 
patient treatment is better than outpatient treatment” 
and that there is a growing body of evidence to in¬ 
dicate that “relapse rates and other outcomes are no 
different as a result of inpatient v. outpatient.” It con¬ 
cludes that “these findings have remained consistent 
across a variety of different approaches to treatment 
and across a diversity of populations. There remains 
little convincing evidence in favor of inpatient treat¬ 
ment or lengthy and intensive treatment.” And be¬ 
cause inpatient treatment programs are consistently 
more expensive than outpatient programs, the 1988 
study further concludes is that “the clear implication 
of currently available data is that outpatient care is 
not only effective, but far more cost-effective than in¬ 
patient care.” 9 


7 Office of Technology Assessment, The Effectiveness and Costs of Alcohol¬ 
ism Treatment, March 1983. 

8 Paul Cotton, “Detox Programs Called ‘Wasteful’.” Medical World News, 
(December 26, 1988), 53. 

9 Leonard Saxe and Lisa Goodman, The Effectiveness of Outpatient v. Inpa¬ 

tient Treatment: Updating the OTA Report, Working Paper, Bigel Institute for 

Health Policy, Brandeis University, 5. The preceding paragraphs use this 
paper as source. 


Effectiveness of Drug Abuse Treatment—Most re¬ 
search on drug abuse treatment until recently has fo¬ 
cused on treatment for heroin addiction. Much of this 
research, on methadone maintenance programs and 
early therapeutic community programs such as 
Synanon, reported success in helping addicts to 
achieve abstinence from heroin. There was skepticism 
about such reports of success, due to flaws in much of 
the research, such as the lack of control groups. 

In 1969, the first national comprehensive study of 
drug abuse treatment effectiveness was initiated as the 
Drug Abuse Reporting Program (DARP). This study 
looked at four major treatment modalities—metha¬ 
done maintenance, therapeutic communities, outpa¬ 
tient drug-free programs, and detoxification. The 
major conclusion of the DARP research was that the 
most favorable results in terms of abstinence or re¬ 
duced drug use and reductions in criminal activity 
were produced by treatment in the three major mo¬ 
dalities, but not by detoxification only. All three pro¬ 
duced similar positive outcomes. The DARP study 
appeared to show that length of treatment was the 
most effective predictor of success in treatment, what¬ 
ever the modality—the clients who remained longer 
in treatment had the most favorable outcomes in 
terms of reduced drug use and criminal activity. The 
data suggested that treatments which lasted less than 
90 days appeared to be of limited benefit, regardless 
of the type of treatment involved. Beyond 90 days, 
treatment outcomes improved in direct proportion to 
the length of time spent in treatment. 10 * * 

A second national study of drug abuse treatment 
effectiveness called the Treatment Outcome Prospec¬ 
tive Study (TOPS) was initiated in the mid-1970s. A 
multi-year study financed by NIDA, the project 
studied 10,000 drug users who entered treatment in 
1979, 1980, or 1981 in 37 selected U.S. drug abuse 
treatment programs representing three major treat¬ 
ment modalities—methadone maintenance, therapeutic 
communities, and outpatient drug-free programs. Pa¬ 
tients who served as study subjects were followed 
from the time they entered treatment, through five 
years after they left treatment. 

The TOPS study addressed the impact of drug 
abuse treatment across the range of settings and for 
clients with varying degrees of dependence and asso¬ 
ciated programs. 11 The study measured the actual re- 


10 D. Wayne Simpson, “National Treatment System Evaluation Based on 
the Drug Abuse Reporting Program (DARP) Followup Research,” [In] Drug 
Abuse Treatment Evaluation: Strategies, Progress, and Prospects, Frank M. Tims 
and Jacqueline P. Ludford, eds. Research Monograph 51, National Institute 
on Drug Abuse, DHHS Publication No. 84-1329. 

11 Robert L. Hubbard, et al., Drug Abuse Treatment: A National Study of 
Effectiveness, 1989. This section of the paper uses this book as source. 


84 




duction of drug use as well as several indicators of 
the patients’ success in building productive lives—de¬ 
crease in criminal activity, excessive alcohol use, de¬ 
pression, and increase in employment. Generally, the 
study found that all of the modalities of treatment 
were effective in reducing drug use up to five years 
after a single course of treatment; they had a more 
limited measure of success in helping clients build 
more productive lives. 

Basically, the TOPS study found that treatment re¬ 
sulted in substantial decreases in the abuse of both 
opiate drugs such as heroin and other drugs as well, 
but that the goal of abstinence was achieved by a rel¬ 
ative few. Pretreatment levels of drug use declined 
dramatically during treatment, increased slightly im¬ 
mediately after treatment relative to in treatment 
levels, and again declined in subsequent periods after 
treatment. The prevalence of regular cocaine use in¬ 
creased slightly three to five years after treatment, 
while use of most other drugs continued to decline. 
These trends for use held for all three treatment mo¬ 
dalities. Time in treatment, as in the DARP study, 
was among the most important predictors of 
posttreatment drug abuse for all types of drugs, par¬ 
ticularly for heroin abuse—the longer a client spent in 
treatment, the better the chances for positive out¬ 
comes. In contrast to the DARP study, however, the 
TOPS study found the time in treatment necessary for 
greater success was relatively long: 6 to 12 months. 
Time in treatment was a less successful predictor of 
reduced posttreatment drug use for cocaine abusers 
and multiple drug abusers. 

The TOPS study also looked at the cost-effective¬ 
ness of treatment and found substantial reductions in 
crime-related and other costs to the Nation of drug 
abusers as a result of treatment. The study found that 
the investment of $5,000 for a year of outpatient drug- 
free or methadone treatment or $15,000 to $20,000 a 
year for residents of therapeutic communities—the 
average annual costs of treatments in the study—pro¬ 
duced benefits that far outweighed the costs. The pre¬ 
vention of AIDS through reduction of intravenous 
drug use is another potential cost-related savings re¬ 
sulting from drug abuse treatment. The study con¬ 
cludes that the reduction in crime-related and other 
costs to society appears to be at least as large as the 
cost of providing treatment and that much of the ex¬ 
penditure is recovered during the time the abuser is in 
treatment. The study concludes that “. . . in that sub¬ 
stantial benefits are to be gained during the treatment 
period in terms of reductions in criminal activity and 
associated costs to the nation, long-term drug abuse 
treatment appears to be an effective mechanism to 
limit the burden of drug abusers on the nation.” 


The TOPS study also recommends several ways in 
which existing treatment efforts could be substantially 
improved through increased outreach and recruitment 
to encourage more drug abusers into treatment, better 
patient assessment and planning to ensure that drug 
abusers receive the services they need, improved 
counseling and increased habilitation and rehabilita¬ 
tion and related services, and increased efforts to 
ensure that clients remain in treatment for the appro¬ 
priate length of time to improve chances of success 
and receive adequate transitional and aftercare serv¬ 
ices after treatment is completed. The report also calls 
for more research on the difficult problems of match¬ 
ing different types of clients with the particular treat¬ 
ment modalities and settings that are most appropriate 
for those clients. The question of what treatment 
works best for what type of client is still difficult to 
answer and for publicly-funded treatment programs 
can be a crucial issue in allocating limited resources. 

One major problem that some researchers have 
with much drug abuse treatment research, including 
the DARP and TOPS studies, is that they concentrate 
for the most part on treatment for heroin addiction. 
Little is known as yet on the effectiveness of treat¬ 
ment for cocaine abuse and polydrug use, which are 
becoming increasingly dominant among drug abusers 
in our society. TOPS study results that showed in¬ 
creased use of cocaine after treatment demonstrate the 
difficulty of successfully treating addiction to this 
drug. 

Effectiveness of Treatment for Mental Illness—The 
NIMH in 1989 published a monograph of papers from 
a 1987 conference on the Future of Mental Health 
Services Research. One of the papers included in the 
monograph reviews research over the past two dec¬ 
ades into the effectiveness of services for the severely 
mentally ill. 12 This review classifies services effec¬ 
tiveness research that address similar issues or inter¬ 
ventions about the following groups of treatments and 
treatment settings: inpatient milieu, 13 length of hospi¬ 
tal stay and early discharge, alternatives to hospital 
admission, and aftercare following an acute episode. 

Hargreaves and Shumway’s review of research into 
the use of milieu therapies found mixed results—little 
benefit with chronically ill schizophrenic patients 


12 William A. Hargreaves, and Martha Shumway, “Effectiveness of Serv¬ 
ices for the Severely Mentally Ill,” in The Future of Mental Health Services, 
Carl A. Taube, David Mechanic, and Ann A. Hoffman, eds., National Insti¬ 
tute of Mental Health, DHHS Publication No. (ADM) 89-1600, 1989. The 
following section of the paper uses this article as source. 

13 Milieu therapy is defined as a “socioenvironmmental therapy in which 
the attitudes and behavior of a treatment program and the activities pre¬ 
scribed for the patient are determined by the patient’s emotional and interper¬ 
sonal needs.” The therapy “has particular meaning where functional behavior 
and activities are modeled in psychiatric settings,” Lee Hyde, The McGraw- 
Hill Essential Dictionary of Health Care, 1988, 301. 


85 



treated in nonintensive milieus in one study, but in 
other studies, apparent benefits from intensive milieu 
therapy with nonchronic schizophrenic patients. 
Other studies found varying levels of effectiveness 
from different forms of milieu therapy with patient 
groups in a variety of settings. 

Studies on the impact of length of hospital stay 
and early discharge on patient outcomes are in effect 
studies on the effectiveness of different forms of de¬ 
institutionalization. One such study which followed 
patients who had spent varying lengths of time in in¬ 
patient treatment before discharge to aftercare in the 
community found that patients who were discharged 
after three weeks in hospital demonstrated fewer 
symptoms than patients who had been hospitalized for 
longer periods of time before release. However, inten¬ 
sive aftercare apparently reduced symptom levels re¬ 
gardless of the length of hospital stay. Hargreaves and 
Shumway conclude that the data suggest that clinical 
goals can usually be accomplished “in brief inpatient 
stays or in appropriately staffed residential treatment 
settings and supportive residences combined with day 
treatment, or through intensive outpatient case man¬ 
agement. In a community lacking adequate capacity 
or quality in such facilities, or for patients who have 
insurance coverage that pays for inpatient care but 
not an alternative,” they go on, “the clinician may 
be forced to substitute inpatient care, but these 
nonoptimal circumstances do not make extended inpa¬ 
tient care the treatment of choice in principle.” They 
also found that studies consistently showed that early 
discharge of long-stay patients is possible if suitable 
community programs exist. Community placement 
does not always produce improvement in psychiatric 
symptoms, but does seem associated with improved 
social function as long as active treatment continues. 

Studies of alternatives to hospital admission look at 
programs that substitute other residential care, day 
care, or alternatives carried out entirely in the com¬ 
munity or in the patient’s home in an attempt to avoid 
hospitalization in the first place. The authors found 
that the studies of alternatives to hospital treatment 
showed good consistency in their results, which they 
found remarkable because of various flaws in individ¬ 
ual studies, and because the studies examined a wide 
variety of treatments in different settings with dispar¬ 
ate patient groups. They found it possible to conclude 
from these studies that “caring for severely ill psychi¬ 
atric patients in ways that avoid or shorten traditional 
hospital treatment is, on average, at least equally ef¬ 
fective and may be more effective than standard use 
of hospital care. Well-organized services using alter¬ 
natives to hospitalization can cost less, sometimes 
much less, without incurring offsetting social or pri¬ 
vate costs, and may provide greater improvement in 


symptoms or social functioning.” The authors do cau¬ 
tion that, despite the positive results of these studies 
on alternatives to hospital admission, they may focus 
too much on crises leading to hospital admission. 
They also note that too few researchers have com¬ 
pared different alternatives to hospital admission or 
studied community settings in which particular mixes 
of strategies may be most cost-effective. 

Studies of aftercare following hospitalization looked 
at a progression of more restrictive to less restrictive 
modes of aftercare, from residential settings such as 
community lodges and halfway houses, to day treat¬ 
ment, outpatient treatment, and case management. As 
with other techniques, the results of the studies on 
these alternatives are mixed. Some have been mod¬ 
estly effective, but others showed disappointing re¬ 
sults. Despite the attention that case management is 
currently receiving in community mental health serv¬ 
ices, Hargreaves and Shumway found little research 
on the efficacy of the concept. They found that sev¬ 
eral demonstration projects seemed to show evidence 
for the effectiveness of case management, but con¬ 
cluded that project design limitations restricted their 
value. Another disappointing study found that ran¬ 
domly assigned case managed subjects, compared to a 
control group, received more services, cost more to 
maintain, and were hospitalized more often without 
showing higher scores on quality of life measures. 

Hargreaves and Shumway conclude that mental 
health treatment services efficacy research has barely 
begun to “to identify the most cost-effective ways to 
organize entire service systems for this target 
population.” 


CURRENT PUBLIC PROGRAMS FOR 
SUBSTANCE ABUSE AND MENTAL 
HEALTH TREATMENT AND RELATED 
SERVICES 

Federal Programs 

Alcohol, Drug Abuse, and Mental Health Block 
Grant—The Alcohol, Drug Abuse, and Mental Health 
Services (ADMS) Block Grant, authorized under P.L. 
97-35, the Omnibus Budget Reconciliation Act of 
1981, authorizes grants to States for alcohol and drug 
prevention, treatment, and rehabilitation programs; 
and for grants to community mental health centers 
(CMHC) for the provision of mental health services, 
including services for the chronically mentally ill, se¬ 
verely mentally disturbed children and adolescents, 


86 


mentally ill elderly individuals, and other underserved 
populations. 

The original formula for the block grant resulted in 
national allocations for substance abuse and mental 
health programs which were approximately equal to 
each other, although the proportions of allocations 
varied from State to State. The authority for the 
ADMS block grant has been amended several times, 
most recently by the 1988 Anti-Drug Abuse Act, P.L. 
100-690. Under the revised block grant authority, ap¬ 
proximately two-thirds of the appropriation nation¬ 
wide is allocated for substance abuse programs and 
one-third for mental health services activities. In FY 
1988, according to NASADAD, a total of 4,786 alco¬ 
hol and/or drug treatment units received block grant 
funds from their States. These treatment units, which 
also receive financial support from other sources such 
as State, county, and other local agencies, and from 
other sources such as client fees and private health in¬ 
surance, admitted nearly 1.2 million clients for treat¬ 
ment during that year. 

The total FY 1989 appropriation for the ADMS 
block grant was $805.6 million, from an authorization 
level for the year of $1.5 billion. In FY 1990, approxi¬ 
mately $1.1 billion will be available for allocation 
among the States, an estimated $237.6 million for 
mental health activities and $895.6 million for sub¬ 
stance abuse activities. 

Department of Veterans Affairs—The VA operates 
an extensive network of mental health and substance 
abuse treatment programs within its medical centers 
and outpatient clinics and related facilities. In FY 
1988, over 50,000 veterans were treated in these facili¬ 
ties for identified drug abuse problems, over 200,000 
were treated for alcohol abuse problems, and over 
214,000 were treated for mental health problems. The 
VA in FY 1988 operated 56 drug treatment inpatient 
programs with 965 beds, 66 drug treatment outpatient 
programs, and 35 methadone maintenance programs. 
For alcohol abuse treatment, it operated 128 inpatient 
programs with 3,500 beds and 139 outpatient treat¬ 
ment programs. For mental health treatment, the VA 
operated 22,169 psychiatric beds in its various facili¬ 
ties in FY 1988. 


EXISTING COVERAGE FOR SUBSTANCE 
ABUSE AND MENTAL HEALTH 
TREATMENT UNDER PUBLIC AND 
PRIVATE HEALTH CARE FINANCING 
PROGRAMS 

Public Health Care Financing 

Medicare—Medicare provides limited services for 
the mentally ill and for substance abusers over the age 
of 65, and for those who have been on SSDI for at 
least 24 months. Medicare services are primarily lim¬ 
ited to inpatient services, reimbursed under part A of 
Medicare. Medicare does not provide a specific bene¬ 
fit for treatment of alcoholism or drug abuse, but 
services are covered which are medically necessary 
and available in a covered setting. Coverage for such 
treatment is available in both general and specialty 
hospitals, such as psychiatric hospitals. Medicare pays 
for treatment in short-term acute care hospitals for 
mental health or substance abuse services under its 
prospective payment system (PPS), while psychiatric 
hospitals and qualified distinct part psychiatric units in 
general hospitals are exempted from PPS and con¬ 
tinue to be reimbursed on a reasonable cost basis 
subject to annual rate of increase limits. Medicare 
coverage of inpatient care furnished in a psychiatric 
hospital, for mental health or substance abuse serv¬ 
ices, is limited to 190 days during a person’s lifetime. 
In FY 1985, Medicare part A benefits for mental 
health services totalled $1.3 billion, of which $252 
million represented payments to psychiatric hospitals. 

Part B of Medicare, until FY 1987, recognized, for 
purposes of reimbursement for outpatient mental 
health services, a maximum of 62.5 percent of $500 of 
such charges in a year, or $312.50, and would reim¬ 
burse 80 percent of this amount, or $250 a year. 
Under OBRA87, the outpatient reimbursement limit 
was increased. For each year after FY 1988, part B 
would recognize the lesser of $1,100 a year or 62.5 
percent of expenditures during that year. Under 
OBRA89, the outpatient reimbursement limit of $1100 
a year was eliminated; the coverage limit of 62.5 per¬ 
cent of total outpatient expenditures in a year still ap¬ 
plies, again with the beneficiary responsible for 20 
percent of that total. Thus, Medicare still pays 50 per¬ 
cent of total expenses for outpatient mental health 
services. Originally, coverage for mental health serv¬ 
ices under part B of Medicare was limited to services 
provided by or supervised by a physician; OBRA87 
included reimbursement, as of July 1, 1988, for ther¬ 
apy provided by a clinical psychologist in a rural 
health clinic or community mental health center. 
Under OBRA89, coverage was extended to services 


87 


of clinical psychologists and social workers without 
regard to location. Under accepted medical references 
that have classified alcoholism as a mental disorder, 
the limitations that apply under Medicare to mental 
health services have been applied also to treatment 
for alcoholism. Such restrictions include the 190 days 
limit on the lifetime number of days of coverage 
available for inpatient care in a psychiatric institution, 
as well as the dollar limit on reimbursement of 
outpatient treatment services. In addition, coverage is 
permitted only for care that represents “active treat¬ 
ment.” In FY 1985, Part B expenditures for mental 
health services subject to the limit totalled $180 
million. 

Medicaid —Medicaid is a major source of funding 
for services for the mentally ill. State Medicaid pro¬ 
grams, may, at their option, cover services in two 
types of institutional mental health providers: “institu¬ 
tions for mental diseases,” or IMDs, and inpatient 
psychiatric hospitals. Services in IMDs may be cov¬ 
ered only for beneficiaries aged 65 and older, while 
services in inpatient psychiatric hospitals may be cov¬ 
ered only for beneficiaries under age 21. Beneficiaries 
who are under 21 at the time they enter such a facil¬ 
ity may continue receiving care until they reach age 
22. In FY 1986, an estimated $1.1 billion in Medicaid 
funds was spent on these institutional mental health 
services for nearly 52.8 thousand beneficiaries. 

Medicaid beneficiaries between age 22 and 65 may 
receive services for mental illness in hospitals and 
nursing facilities that are not IMDs or psychiatric 
hospitals. It is not possible to provide data on the 
extent of this coverage as Medicaid data do not distin¬ 
guish expenditures for treatment for mental as op¬ 
posed to physical problems by providers other than 
mental institutions. 

Medicaid also covers mental health services for its 
beneficiary population in a variety of outpatient set¬ 
tings. Coverage limits for such services vary from 
State to State. In 1984, for instance, services in mental 
health clinics were covered by 44 States. Clinic pro¬ 
viders in those States may include State or county fa¬ 
cilities, some of them also funded through the ADMS 
block grant, as well as private providers. States also 
cover mental health services furnished in hospital out¬ 
patient departments. In a number of States, outpatient 
mental health services may include “partial hospital¬ 
ization” or “psychiatric day care” programs. These 
provide services in a structured setting for part of the 
day for patients living in the community. Some States 
cover comparable programs furnished by mental 
health clinics. 


In most States, Medicaid beneficiaries may obtain 
services from psychiatrists under the same rules that 
apply when they obtain services from physicians in 
other specialties. Beneficiaries may also receive some 
mental health care from physicians who are not psy¬ 
chiatrists. For reasons relating in part to State re¬ 
imbursement and coverage policies, however, many 
psychiatrists have been reluctant to participate in the 
program. 

Only a few States cover the services of other types 
of mental health professionals. Clinical psychologists 
were covered in 21 States in 1984, but only three cov¬ 
ered any other type of professional, such as clinical 
social workers or psychiatric nurses. Some States may 
pay for services furnished by psychologists or other 
mental health professionals if they are providing serv¬ 
ices under the direct supervision of a physician, either 
in the physician’s office or in a clinic setting. 

Some States also cover alcohol and drug abuse 
treatment services in their Medicaid programs. A 
1984 State survey found 10 such States, including 7 
(Connecticut, Florida, Georgia, Kentucky, Louisiana, 
North Carolina, and South Dakota) which provided 
services in community mental health centers and/or 
clinics. Three other States, Washington, Minnesota, 
and Wisconsin also reimbursed for alcohol and drug 
abuse treatment services under the following catego¬ 
ries: inpatient hospital, physician services, and non¬ 
physician services, respectively. 


Private Health Insurance 

State Laws Mandating Health Insurance Coverage 
for Substance Abuse and Mental Illness —Because of 
the traditionally limited coverage for treatment of 
substance abuse and mental illness in the private insur¬ 
ance marketplace, State governments in recent years 
have been asked to exercise their regulatory authority 
over the insurance industry and require the expansion 
of such benefits. Starting in the early 1970s, a number 
of State legislatures began enacting legislation to re¬ 
quire benefits for alcohol, drug abuse, and mental 
health treatment to be covered by health insurance 
available in the State. Other State legislatures enacted 
less stringent versions of such legislation to require 
only that health insurers offer such benefits to the pol¬ 
icyholder at his option. 

A 1986 survey of State laws regulating private 
health insurance benefits for mental health and 
substance abuse found that 14 States had statutes man¬ 
dating insurers to pay for mental health care in group 
insurance policies, some of these States also man- 


88 


dated coverage in individual policies as well. Twelve 
States required only that insurance policies “offer” 
such coverage at the policyholder’s option. Three 
States had laws with both mandatory and optional 
provisions. 

The 1986 survey found 35 States which had passed 
legislation requiring insurers either to provide benefits 
for alcoholism and drug abuse treatment services or 
to offer such coverage. Twenty-two States had man¬ 
datory coverage laws. These coverage laws are not 
uniform and mandate a wide variety of benefits; some 
States combine a mandate with an option, such as in¬ 
patient coverage might be mandated, while outpatient 
coverage might only be offered. Twenty-one States 
chose to require health insurers to make coverage 
available for substance abuse services. Different States 
mandate coverage of varying numbers of days of 
inpatient hospital coverage for mental illness or for 
substance abuse treatment—30 to 70 days a year for 
inpatient mental health treatment, and from 3 to 21 
days for detoxification, and from 10 to 45 days for in¬ 
patient substance abuse treatment. States also mandate 
coverage of varying numbers of outpatient treatment 
days, and provide for different limits of dollars of 
coverage. 14 

Private Employer-Based Health Insurance Cover¬ 
age—A BLS survey of employee benefits in medium 
and large firms in 1988 describes mental health and 
substance abuse treatment coverage in employee 
health insurance benefits. The survey found that 
mental health coverage, although available to nearly 
all participants, was commonly subject to special limi¬ 
tations. The BLS found that 71 percent of participants 
in plans with mental health benefits had more restric¬ 
tive hospital coverage for mental illness than for other 
illnesses—up from 61 percent in 1986 and 43 percent 
in 1982. Plans generally limited the duration of hospi¬ 
tal stays, often to 30 or 60 days per year for mental 
illness, compared to 120, 365, or unlimited days for 
other illnesses; and sometimes they imposed a sepa¬ 
rate, lower, maximum on covered hospital expenses, 
such as a lifetime maximum of $50,000 on all mental 
health benefits. 

Plans had even more restrictive coverage for 
mental health care outside the hospital (psychiatric 
office visits). Such special limits affected 95 percent of 
participants in 1988, up from 91 percent in 1986 and 
84 percent in 1982. Outpatient mental health care also 
was generally covered for fewer visits per year than 
other outpatient services, subject to special maximum 


14 Intergovernmental Health Policy Project, State Laws Mandating Private 
Health Insurance Benefits for Mental Health, Alcoholism, and Drug Abuse, 
State Health Reports: Mental Health, Alcoholism, and Drug Abuse (January 
1986). 


dollar limits on annual payments, and covered at a 
coinsurance rate of 50 percent rather than the 80 per¬ 
cent often paid by plans for other illnesses. Also, out¬ 
patient mental health care expenses often did not 
count toward the maximum out-of-pocket expense 
limitation, and the reimbursement for these expenses 
did not increase to 100 percent if the out-of-pocket 
expense limitation was met, as with other services. 

The BLS survey of private employee benefits in 
1988 found that alcohol and drug abuse treatment 
benefits covered 80 and 74 percent of health care 
participants, respectively. Treatment covered under 
substance abuse care included detoxification and reha¬ 
bilitation. Ninety-five percent of all participants with 
some form of alcohol abuse benefits were covered for 
inpatient detoxification, and 78 percent for inpatient 
rehabilitation. As detoxification is generally consid¬ 
ered medically necessary, nearly all plans that cover 
alcohol abuse treatment benefits cover it. There is a 
greater tendency, according to the BLS survey, to ex¬ 
clude inpatient rehabilitation, since it requires less 
constant, immediate care. Outpatient alcohol abuse 
treatment, generally for rehabilitation services, was 
available to 84 percent of participants with alcoholism 
coverage. Coverage patterns for drug abuse benefits 
were similar. 

As with mental health coverage, plans were more 
restrictive in covering substance abuse treatment than 
other illnesses. It was more likely, however, for inpa¬ 
tient detoxification to be treated the same as other 
conditions than inpatient rehabilitation or outpatient 
care. Slightly more than two-thirds of participants 
with inpatient alcohol detoxification care had their 
coverage either subject to separate limitations or to 
the same limitations as for mental illnesses. This con¬ 
trasts with inpatient rehabilitation and outpatient care, 
where about four-fifths of participants had their cov¬ 
erage subject to separate limitations or covered the 
same as mental health care. 

Separate limitations for substance abuse treatment 
most commonly included restrictions on the number 
of days of inpatient hospital care per year, the number 
of outpatient visits per year, and maximum dollar 
amounts of benefits per year or per lifetime. Limita¬ 
tions on days and dollars were often combined for 
alcohol and drug abuse care. A typical limitation on 
inpatient care was 30 days a year. Similarly, outpa¬ 
tient care might be restricted to 20 or 30 visits per 
year. 15 


15 Bureau of Labor Statistics, Employee Benefits in Medium and Large 
Firms, 1988, BLS Bulletin 2336 (August 1989), 39 and 40. 


89 




Federal Employees Health Benefits Coverage—As 
with health insurance available to State and local 
public employees and to workers in the private sector, 
substance abuse and mental health benefits available 
to Federal employees under the Federal Employees 
Health Benefits Program are generally subject to spe¬ 
cial limitations. According to the Checkbook's Guide 
to 1990 Health Insurance Plans for Federal Employees 
and the American Psychiatric Association's Coverage 
Catalog, virtually all plans available to Federal em¬ 
ployees treat inpatient mental health care, including, 
in most cases, inpatient treatment for alcoholism or 
drug abuse, differently from other hospital care. Cov¬ 
erage limitations include fewer days of hospitalization 
covered in full and a lower ceiling on covered in¬ 
patient expenses than for other illnesses. Similar limi¬ 
tations apply to coverage for alcohol and drug abuse 
inpatient treatment as well as for outpatient services 
for all three conditions. 16 


ISSUES IN CONSIDERING A BENEFIT 
PACKAGE FOR SUBSTANCE ABUSE 
AND MENTAL HEALTH SERVICES 

Mental illness and substance abuse are often chronic 
disorders requiring periodic use of treatment services 
over a long period of years. At the present time, it is 
clear that there is no agreement on treatment modali¬ 
ties and settings for these disorders and little uniform¬ 
ity in benefit structures among third-party payers for 
substance abuse and mental health treatment services. 
Persons suffering from these disorders, or with family 
members suffering from such disorders, who have 
access through their employment to health insurance 
are more likely, when given a choice, to select insur¬ 
ance coverage with the most comprehensive benefit 
packages for such services. Attempts by insurers to 
avoid incurring the costs of covering these “high 
risk” patients have led to the benefits limits for mental 
health and substance abuse treatment coverage that 
characterize current health insurance practice. Some 
would argue that establishing a basic minimum level 
of coverage for mental health and substance abuse 
treatment would eliminate the need for the limits in 
coverage that currently exist. 


16 Walton Francis and editors of Washington Consumers’ CHECKBOOK 
Magazine, Checkbook's Guide to Health Insurance Plans for Federal Employees, 
1989; and Patrice Scheidemandel, compiler, The Coverage Catalog, American 
Psychiatric Association, 1989. 


Rationale for Including Substance Abuse and 
Mental Health Coverage in a Benefit Package 

Several issues need to be discussed in considering 
the design of a uniform health insurance benefit for 
substance abuse and mental health treatment services, 
the first issue being whether to include such coverage 
at all. The most basic argument for covering such 
benefits is that these disorders are illnesses for which 
treatment should be reimbursed on the same basis as 
any other illness, that providing benefits to reimburse 
the treatment of substance abuse and mental illness 
constitutes responsible and humane social policy in re¬ 
sponse to a significant public need. In addition, requir¬ 
ing the reimbursement of mental health and substance 
abuse treatment at a level more comparable to that 
for other illnesses could help to remove or reduce the 
stigma associated with these disorders and help to 
improve the availability of and accessibility to such 
services. 

Some argue that the treatment of substance abuse 
and mental health disorders result, in the long term, in 
reduction in treatment for other health disorders. Ac¬ 
cording to this argument, the net cost of treatment for 
substance abuse and mental health care would thus be 
reduced by the extent of savings in general medical 
care utilization. Reviews of research on the signifi¬ 
cance of this medical cost offset have found that such 
reductions did take place. One study reported that 12 
of 13 studies in mental health care found reductions of 
5 to 85 percent in medical care utilization subsequent 
to a mental health intervention and reductions of 26 
to 69 percent in medical care utilization in 12 studies 
on alcohol abuse treatment. 17 Others find the re¬ 
search findings on the medical cost offset of substance 
abuse and mental health treatment unconvincing, be¬ 
cause of a variety of methodological limitations in the 
research. 18 

Increasing insurance coverage for substance abuse 
and mental health treatment would likely result in 
some cost-shifting from the public to the private 
sector. Mental health and substance abuse treatment 
that is not covered by private health insurance has 
traditionally been supported primarily by government 
funds. The Federal Government supports such care 
through Medicare and Medicaid, the Department of 
Veterans Affairs, and the ADMS block grant. State 
and local governments support and provide care 
through such providers as public general and psychi- 

17 Kenneth R. Jones, and Thomas R. Vischi, “Impact of Alcohol, Drug 
Abuse, and Mental Health Treatment on Medical Care Utilization: A Review 
of the Research Literature,” Medical Care, (17) (December 1979). 

18 David Mechanic, “The Evolution of Mental Health Services and Mental 
Health Services Research,” in The Future of Mental Health Services Research, 
NIMH, 1989, 5. 


90 




atric hospitals and other facilities. It can be argued 
that requiring increased benefit coverage under pri¬ 
vate health insurance would shift some of these costs 
to the private sector, reduce the burden of the public 
sector, and generally broaden the base of fmancial 
support for treatment services. 

Some who oppose a required benefit for substance 
abuse and mental health services do so because they 
feel that providers of such services often reside out¬ 
side the traditional health care system where there is 
little quality control and little hard evidence that 
treatment is effective. As many alcohol and drug 
abuse treatment programs and providers exist apart 
from the established health care system, this argument 
goes, there is little assurance that the quality of serv¬ 
ices delivered meets established levels of care in the 
traditional health delivery system. In addition, the fact 
that there is still so little agreement on the efficacy of 
the various treatments for these disorders makes some 
observers reluctant to support enhanced insurance 
coverage. 

Others may oppose including the benefit in a pack¬ 
age because of the nature of these disorders, feeling 
that the majority of the insured population do not 
abuse these substances and should not be forced to 
pay for the self-inflicted problems of those who 
choose to abuse alcohol and drugs. According to this 
argument, most members of the population use 
alcohol and prescription drugs moderately and re¬ 
sponsibly, and should not be forced to pay for the 
consequences of alcohol or drug abuse by a minority 
of persons who choose to act irresponsibly. Since 
alcoholism and drug addiction are self-inflicted prob¬ 
lems, the proper response to such abuse is for the 
person involved to moderate such behavior and stop 
the abuse. Insurance premiums collected from the ma¬ 
jority of insurance subscribers should not have to be 
used to pay for the self-inflicted problems of a few. 19 


Design of a Benefit Package 

If a decision is made to include substance abuse and 
mental health coverage in a benefit package, further 
issues arise on what such a benefit package should in¬ 
clude. Should mental health and substance abuse 
treatment services be covered on the same basis as 
other illnesses, or should there be limits on coverage 
for such care? If it is determined that substance abuse 
and mental health care should not be covered on the 
same basis as other care, where should limits be 


19 “Private Health Insurance Coverage for Alcoholism and Drug Depend¬ 
ency Services: State Legislation that Mandates Benefits or Requires Insurers 
to Offer Such Benefits for Purchase. 1 ’ NASADAD Alcohol and Drug Abuse 
Report (January’/February' 1986). 


made—in types of providers, in numbers of days or 
visits of care covered, or in dollars of care covered? 
What kinds of cost-sharing measures, if any, should be 
included? What kinds of cost containment measures 
should be included? 

There is evidence that the existence of increased 
third-party coverage for health services may lead to 
an increase in unnecessary and excessive use of such 
services, a phenomenon known as moral hazard. 
Some people, particularly those with less severe 
mental health disorders, will apparently use outpatient 
mental health services if covered by health insurance 
that they would not have chosen to use if they had to 
pay the full cost for the services out of pocket. This 
appears to be the case for outpatient mental health 
care more than for other outpatient health care serv¬ 
ices. Some argue that improving mental health and 
substance abuse treatment coverage and the increased 
use of services that may follow because of moral 
hazard will increase costs substantially. As a result, in¬ 
surers would have to increase premiums to pay for 
the care to such an extent that premiums would ap¬ 
proach the cost of care. Research seems to indicate 
that use of ambulatory mental health care is respon¬ 
sive to patient cost sharing. Low copayments with no 
utilization limits would likely produce significantly 
higher use of outpatient services and high benefit 
costs; a plan with a high level of patient cost sharing 
combined with a catastrophic ceiling produces lower 
use of services and lower costs. 20 

On the other hand, research seems to indicate that 
inpatient mental health care is not responsive to cost 
sharing, but does respond to prospective payment, 
length of stay limits, and fixed budget reimburse¬ 
ment. 21 A 1986 NIMH report suggesting modifica¬ 
tions to Medicare’s prospective payment system to 
cover inpatient treatment for mental illness may have 
value in designing inpatient coverage under a man¬ 
dated benefit. This report recommended classifying 
patients by diagnosis, treatment, and age—“Three 
groups of mental illness—psychoses, organic dis¬ 
orders, all others—could each be subdivided by 
intensity of treatment. It is possible to differentiate in¬ 
tensive treatment from routine treatment. (Intensive 
treatment is typical of specialty psychiatric facilities, 
while routine treatment is typical of the psychiatric 
treatment provided in so-called scatter beds, that is, 
general hospital beds not located in a psychiatric unit. 
Further, because child and adolescent patients who 
receive intensive treatment appear to stay much 


20 Willard G. Manning, Jr., et al., “How Cost Sharing Affects the Use of 
Ambulatory Mental Health Services,” Journal of the American Medical Asso¬ 
ciation, (256) (October 10, 1986), 1933. 

21 Thomas G. McGuire, “Financing and Reimbursement for Mental Health 
Services,” In The Future of Mental Health Services Research, NIMH, 1989. 


91 


28-861 - 90 - 4 : QL 4 




longer than other patients, age could be a defining 
characteristic.” 22 ) 

Mental health and substance abuse for young 
people may be a matter of particular concern in de¬ 
signing a benefit package. Research appears to indi¬ 
cate that teenagers account for a larger percentage of 
the costs and utilization of psychiatric and substance 
abuse health insurance benefits than other age groups. 
A recent research report notes that much of the care 
provided adolescents is provided in hospitals, the 
most expensive of all treatment settings, and suggests 
that, in some cases, outpatient or residential programs, 
especially those that involve the entire family, are 
much less expensive and are equally or more effective 
for treating adolescent mental health and/or substance 
abuse problems. 23 

In considering coverage for treatment of mental ill¬ 
ness and substance abuse, it would be helpful to be 
able to take into account what is known about the 
most effective ways of providing such care in de¬ 
signing the most efficient and cost-effective benefit 
package. It may be, however, that there is too little 
definitive information available about the relative 
effectiveness of various treatment modalities and set¬ 
tings to be useful in designing a benefit package. The 
mental health treatment research review cited above 
appears to show, for instance, that a combination of 
short- rather than long-term inpatient care combined 
with intensive aftercare services in the community, or 
alternative treatment in the community that avoids 
hospitalization completely, can be both effective and 
cost-effective in treating severe mental illnesses. 


22 Antoinette Gattozzi, Prospective Payment of Mental Health Care, State 
Health Reports: Mental Health, Alcoholism, and Drug Abuse (April 1986). 

23 “Psychiatric/Substance Abuse Benefits Costs, Utilization Are Highest 
For Adolescents,” Spencer’s Research Reports on Employee Benefits (January 
1990). 


There is some feeling in the substance abuse treat¬ 
ment community that the 28-day inpatient treatment 
model that appears to dominate the field, particularly 
for alcoholism treatment, may not always be the most 
effective or cost-effective method of treatment. The 
alcoholism treatment research cited above seems to 
favor a short course of inpatient care combined with 
longer term outpatient care as a more cost-effective 
form of treatment than longer term inpatient care. 
Drug abuse treatment research has found that the 
longer the course of treatment the greater the chances 
of success. It is difficult to imagine an employer fa¬ 
voring the coverage, under an employee insurance 
package, of a course of treatment of a year or more in 
a therapeutic community, not only because of the cost 
of such treatment, but because of the additional oper¬ 
ating costs and inefficiencies of losing an employee 
for a year or more. In addition, it must be noted that 
long-term drug abuse treatment research has concen¬ 
trated on treatment for heroin addiction, and little is 
known as yet about its applicability to treatment for 
cocaine abuse. 

• Those without health insurance coverage for 
mental health care or treatment for substance abuse 
have traditionally had to depend on publicly-financed 
care in State and locally-financed facilities, inpatient 
and outpatient, with their flaws and limitations. With 
the recidivism and repeated need for treatment that is 
common among some alcohol and drug abusers, as 
well as the long-term, often life-long, care necessary 
for many chronically mentally ill persons, the design 
of any mandated benefit package would probably 
need to retain some limits in the courses of treatment 
for substance abuse that would be covered before a 
patient were forced to fall back on the public sector 
for care. 


92 



QUALITY ASSURANCE: A COMPREHENSIVE, NA¬ 
TIONAL STRATEGY FOR HEALTH CARE IS 
NEEDED * 


B-237200 
February 21, 1990 

The Honorable John D. Rockefeller IV 
Chairman, The Pepper Commission 
United States Bipartisan Commission on 

Comprehensive Health Care 

Dear Mr. Chairman: 

In response to your request of August 11, 1989, we 
have examined the issues that would need to be ad¬ 
dressed in ensuring the quality of health care under 
any plan to expand health care coverage for the unin¬ 
sured. We have assumed that the current system of 
multiple public and private purchasers of health care 
will remain in place for at least the immediate future. 
In addition, we have examined the adequacy of the 
knowledge base for structuring such quality assurance 
activities. However, because we believe that most of 
the quality assurance issues that would need to be ad¬ 
dressed are generic, much of this report does not dis¬ 
tinguish between quality assurance for the uninsured 
and for the general population. 

This briefing report presents the results of our work 
as discussed with your staff on January 23, 1990. We 
begin by noting that quality is multidimensional and 
that we have focused our attention on the appropri¬ 
ateness of care and the technical and clinical aspects 
of quality. We also note that health care system 
design has important implications for quality, and we 
briefly describe the various levels at which quality as¬ 
surance activities are currently conducted. We con¬ 
clude that there is a considerable body of knowledge 
about, and experience with, the organization and con¬ 
duct of quality assessment and assurance activities and 

• This report has been furnished by the U.S. General Accounting Office at 
the request of the Chairman of the U.S. Bipartisan Commission on Compre¬ 
hensive Health Care. It is reprinted from a GAO report of the same title. 
GAO/PEMD-90-14BR (Washington, D.C.: February 21, 1990). 


a growing interest in improving and expanding these 
activities among many of the participants, including 
the medical community, consumers, employers, and 
purchasers of care. 

In keeping with this growing interest, we suggest 
that a comprehensive, national strategy for assessing 
and assuring the quality of health care is needed. We 
see at least four elements as essential to a comprehen¬ 
sive national strategy: (1) national practice guidelines 
and standards of care; (2) enhanced data to support 
quality assurance activities; (3) improved approaches 
to quality assessment and assurance at the local level; 
and (4) a national focus for developing, implementing, 
and monitoring a national system. The reasons we see 
for needing a comprehensive national approach and a 
brief discussion of each of its elements are contained 
in section 2 of this report. 

Our conclusions are based primarily on the studies 
of health care quality assessment and assurance in a 
number of settings spanning the public and private 
sectors that we have conducted over the past few 
years. We have also incorporated concepts and infor¬ 
mation on quality assurance contained in published 
sources, including the Institute of Medicine’s report 
entitled Controlling Costs and Changing Patient Care? 
and the Office of Technology Assessment’s report en¬ 
titled The Quality of Medical Care: Information for 
Consumers. Finally, we convened a meeting of experts 
in November 1989 for the explicit purpose of explor¬ 
ing these issues and have had them review a draft of 
this report. (See appendix I.) We have not conducted 
a comprehensive review and analysis of existing qual¬ 
ity assurance programs. Any references in this report 
to specific quality assurance programs are examples 
used to illustrate particular points and do not neces¬ 
sarily represent the “best” programs available. 

Our work was performed in accordance with gen¬ 
erally accepted government auditing standards. We 
have incorporated the comments of our experts but 


93 



have not requested comments from any federal 
agency, since none is evaluated in this work. Unless 
you publicly announce the contents of this report ear¬ 
lier, we plan no further distribution until 30 days from 
its date. We will then make copies available to others 
upon request. If you have any questions or would like 
additional information, please call me at (202) 275- 
1854 or Mr. Robert York, Acting Director of Pro¬ 
gram Evaluation in Human Services Areas, at (202) 
275-5885. Other major contributors to this report are 
listed in appendix II. 

Sincerely yours, 

Eleanor Chelimsky 
Assistant Comptroller General 


SECTION 1—QUALITY, QUALITY 
ASSURANCE, AND THE 
HEALTH CARE SYSTEM 

In this section, we begin with an overview of the 
concept of health care quality and how we use it in 
this report. We draw a distinction between quality as¬ 
sessment and quality assurance, which is important for 
our discussion of the need for a national, comprehen¬ 
sive quality assurance strategy in section 2. We note 
some instances in which the design and operation of 
the health care system itself can influence quality 
quite independently of any formal mechanism for re¬ 
viewing the quality of care. Finally, we briefly de¬ 
scribe the different levels in the health care system at 
which quality issues may be addressed. 


Quality Is Multidimensional 

The quality of care is a multidimensional concept 
that defies simple definition. Quality encompasses 
many aspects of care and means different things to 
different people. Patients, health care providers, and 
purchasers may have different notions about what 
constitutes high-quality care. 

• To patients, “getting better” (that is, the outcome 
of care) is probably the primary concern. In addi¬ 
tion, having access to care that is affordable, con¬ 
veniently available, and provided in a manner 
that respects their concerns and preferences is im¬ 
portant. The responsiveness of the delivery 
system may also be important—for example, 
meeting patients’ individual needs for emergency 


care, coordinating services, and making appropri¬ 
ate referrals. 

• Health care providers may emphasize the deci¬ 
sionmaking process that underlies diagnosis and 
treatment, the clinical content of care, and the 
technical skill with which it is rendered. 

• Purchasers may place greater weight on ques¬ 
tions of cost-effectiveness, including the need for 
individual diagnostic and therapeutic services, the 
appropriateness of the setting in which care is de¬ 
livered, and the frequency, timing, and duration 
of services. 

All these views of quality are legitimate and im¬ 
portant. However, our primary focus is on the appro¬ 
priateness of medical services and their clinical and 
technical quality. This implies a concern for such 
issues as whether necessary care was provided, 
whether the outcome was acceptable, whether unnec¬ 
essary services were provided, and whether the loca¬ 
tion of care (that is, hospital, nursing home, home, 
ambulatory setting, and so on) was consistent with the 
patient’s needs. 

There are important. reasons for this focus. First, 
and perhaps most important, providing appropriate 
medical care that is effective is the common denomi¬ 
nator of the preferences of all three groups. Second, 
providing improved access to inappropriate care or 
poor-quality care is not likely to result in improved 
health outcomes. Third, currently available strategies 
for assessing and assuring quality are targeted espe¬ 
cially to the appropriateness of care and to technical 
aspects of quality. As a result, focusing attention in 
these areas offers the greatest potential for near-term 
improvements in quality. 


Quality Assessment Should Be Distinguished 
From Quality Assurance 

It is important to distinguish between quality assess¬ 
ment and quality assurance. Quality assessment in¬ 
volves the use of measures of quality, based on either 
explicit or implicit criteria, to assess the structure, 
process, and outcome of care and to monitor levels 
of quality over time. Quality assurance goes beyond 
the simple assessment of quality to include its im¬ 
provement. This requires identifying and confirming 
problems in the quality of medical care, planning 
interventions to lessen or eliminate the problems, 
monitoring the effectiveness of the interventions, and 
instituting additional changes and monitoring where 
warranted. 


94 


Quality assessment is a prerequisite to quality assur¬ 
ance. It can be performed by an external assessor, as¬ 
suming that the information necessary to assess the 
medical care is available and that criteria exist for 
specifying the constituents of high quality. Under 
these conditions, potential problems with the quality 
of care can be easily identified. 

Successful quality assurance is more difficult, since 
it involves either preventing poor-quality care from 
occurring or improving levels of quality, which fre¬ 
quently requires behavior change on the part of 
health care providers. One example of an approach to 
preventing poor-quality care is to require external ap¬ 
proval of health care interventions before the care is 
provided. This approach works because care that is 
not approved is unlikely to be reimbursed and this 
lessens the likelihood that the presumably inappropri¬ 
ate care will be provided. 

But such approaches apply to individual services or 
procedures patient by patient. They do little to en¬ 
courage providers to change their behavior or to 
create an environment for improving general levels of 
quality over time. Accomplishing the latter is gener¬ 
ally assumed to require the commitment and involve¬ 
ment of the health care providers whose care is under 
review. This involvement is particularly important in 
the “gray” areas of medicine where there may be un¬ 
certainty about what the proper course of treatment is 
and considerable variation among physicians in how 
they currently care for patients. If physicians and 
other health care providers collectively examine infor¬ 
mation on current practice patterns and determine the 
reasons for variation and the preferred methods of 
treatment, the potential payoff in terms of improving 
overall levels of quality is considerable. 

Quality assurance systems typically concentrate on 
quality assessment and on the identification of the rel¬ 
atively small number of providers whose care is obvi¬ 
ously unacceptable. They do comparatively little in 
attempting to directly improve the overall levels of 
quality provided by the majority of health profes¬ 
sionals. This is more difficult to accomplish, par¬ 
ticularly if imposed on health professionals from the 
outside. If we think of the performance of health care 
providers in terms of the bell-shaped curve of a 
normal distribution, the challenge is to devise a qual¬ 
ity assurance strategy that not only deals appropri¬ 
ately with the outliers but also assists in moving the 
entire distribution to a higher level of quality. 


Health Care System Design 
Influences Quality 

Quality is potentially influenced by almost every 
aspect of the design and performance of the health 
care system. While it is important to have effective 
systems for monitoring the quality of care after it is 
provided, it is equally, if not more, important to try to 
“build it in” up front. In particular, having access to 
needed services is a prerequisite for receiving services 
of high quality. For example, if a program 

• does not cover a range of preventive, acute, and 
continuing services that are needed by the eligi¬ 
ble population, then individuals may not have 
access to needed services; 

• does not allow adequate reimbursement for cer¬ 
tain services, then providers may decline to pro¬ 
vide those services and access to care may be 
impeded; 

• has inefficient or burdensome administrative re¬ 
quirements, then providers may choose not to 
accept patients covered by that program, again 
curtailing access; 

• has limited ability to direct patients to high-qual¬ 
ity providers or to foster quality among partici¬ 
pating providers, then the care patients receive 
may be of varying levels of quality. 

Systemic issues also affect quality. For example, an 
oversupply of a particular medical specialty or hospi¬ 
tal service in a given area may mean that no pro¬ 
vider serves enough patients to develop and maintain 
necessary skills or that unnecessary services will be 
provided in order to maintain patient volume. Mal¬ 
practice is another example. The fear of malpractice 
suits may cause some providers to give care that is 
not needed and, in the case of invasive procedures, 
put the patient at unnecessary risk. High malpractice 
premiums and judgments may contribute to increasing 
health care costs, thereby lessening access to care for 
some people. While a detailed consideration of these 
issues is beyond the scope of this report, they are 
nonetheless important and deserve attention. Some of 
them are being addressed in other studies under way 
at GAO. 

Quality Assessment and Assurance 
Occur at Many Levels 

Throughout the nation, many existing programs of 
quality assessment and assurance can provide a foun¬ 
dation for the review of quality under new initiatives 


95 


to expand health care coverage. Purchasers of health 
care have instituted quality assessment and assurance 
programs to fulfill their fiduciary or public account¬ 
ability responsibilities to persons whose care they fi¬ 
nance. The Health Care Financing Administration 
conducts quality assurance activities for Medicare 
through its system of Peer Review Organizations 
(PROs) for primarily hospital and some ambulatory 
care and through carriers and intermediaries for 
nonhospital care. The Health Care Financing Admin¬ 
istration’s annual release of hospital mortality statistics 
and information on the quality of care in nursing 
homes are additional examples of such activities. State 
Medicaid agencies have requirements to monitor the 
use of services by Medicaid recipients; this is accom¬ 
plished in a number of states through contracts with 
the PROs. Finally, private insurers also have quality 
assessment and assurance systems that resemble those 
of Medicare and Medicaid but also vary, depending 
on the needs of the health care purchaser and reim¬ 
bursement methods. 

The approaches above to quality assurance are 
sometimes referred to as “external,” “regulatory,” or 
“administrative” quality assurance. Their intent is to 
make sure that the care for which payment is made is 
appropriate. There is an emphasis on utilization con¬ 
trol, although outcomes and other aspects of quality 
may also be examined, as exemplified by the PRO’S 
use of generic quality screens. The reviews of care 
are frequently conducted far from the site of care. 
While there may be some interaction with, and feed¬ 
back of information to, the providers whose care is 
being reviewed, the providers themselves are not 
deeply involved in the process of review. Quality as¬ 
sessment is a more dominant feature of these activities 
than quality assurance. 

The quality of care may also be monitored and in¬ 
fluenced at the community level or within a health 
service area. In addition to the review of the quality 
or appropriateness of individual services, quality-rele¬ 
vant issues to be addressed include whether there is 
an appropriate supply and distribution of health care 
providers of various types and specialties, whether the 
volume of services provided by individual providers 
is high enough to maintain acceptable skill levels, and 
whether effective mechanisms exist to refer patients to 
needed services, coordinate those services, and place 
patients at appropriate levels of care. Because of the 
highly individualized and dispersed nature of health 
care, many communities lack a structure for making 
such judgments and exerting leverage on the health 
care system. However, there are some voluntary ef¬ 
forts to develop community-wide programs. For ex¬ 
ample, a plan called Cleveland Health Quality Choice, 
involving the physician, hospital, and business com¬ 


munities, is committed to evaluating the quality of 
hospital care in the Cleveland area and directing 
patients to hospitals providing high-quality care. In 
Minnesota, the Twin Cities Voluntary Health Care 
Information Project is reviewing quality indicators for 
hospitals and health plans in hopes of assisting health 
care purchasers and providers in making purchasing 
decisions. 

Finally, many health care institutions, as well as in¬ 
dividual providers, have voluntarily implemented 
their own internal quality assurance programs, reflect¬ 
ing a commitment to what has been termed “continu¬ 
ous quality improvement.” The Harvard Community 
Health Plan, for example, has developed and imple¬ 
mented a program to measure quality of care that 
generates information to be used by clinicians and 
managers for identifying the reasons for problems and 
instituting changes intended to improve the quality of 
care. The Park Nicollet Medical Center in Minne¬ 
apolis has developed an internal system for monitor¬ 
ing health care outcomes, concentrating initially on 
patients with heart disease and arthritis. Individual 
hospitals have instituted similar approaches. Small 
physician practices, lacking an organizational struc¬ 
ture and patient volume to warrant a structured, 
statistical reporting system, have nevertheless imple¬ 
mented ongoing quality reviews through such ap¬ 
proaches as bringing in outside peer reviewers to 
review their case records and to give them feedback 
on strengths and areas for improvement. The key to 
these initiatives is that they are voluntarily and inter¬ 
nally generated. The health professionals involved are 
committed to determining the levels of quality of the 
care they currently provide, identifying opportunities 
for improvement, and seeing that improvement occurs 
and quality is ensured. 

Some health care analysts have viewed these vari¬ 
ous levels of quality assessment and assurance as 
being either redundant or in opposition to one an¬ 
other, if not actually working at cross purposes. This 
is particularly true when the paperwork and adminis¬ 
trative requirements of external reviews are burden¬ 
some and are not viewed as adequately addressing 
and resolving true quality problems. However, there 
are examples of situations in which the various levels 
have been complementary and mutually reinforcing. 
And, in some instances, the presence of external 
review has provided an impetus for initiating internal 
reviews. 

We believe that the important thing to note is the 
considerable body of knowledge about, and experi¬ 
ence with, organizing and conducting quality assess¬ 
ment and assurance activities. There also appears to 
be growing interest in improving and expanding these 


96 


activities among many of the participants, including 
the medical community, consumers, employers, and 
purchasers of care. While this interest could be mani¬ 
fested in an increased regulatory burden, it could also 
be developed into a more balanced system of quality 
assurance that uses external entities to monitor overall 
levels of quality of care and identify potential prob¬ 
lems. More direct interventions could be limited to 
instances in which serious quality problems are con¬ 
firmed or when a provider’s internal quality assurance 
mechanisms appear to have failed. The hope that a 
better balance between internal and external quality 
assurance can be achieved has shaped many of the ob¬ 
servations and suggestions in the next section. 


SECTION 2—A COMPREHENSIVE, 
NATIONAL QUALITY ASSURANCE 
STRATEGY IS NEEDED 

We believe that a comprehensive, national ap¬ 
proach to quality assurance is required. By compre¬ 
hensive and national we mean that, regardless of the 
source of payment or individual patients’ circum¬ 
stances, similar individuals with similar medical needs 
should be assured of receiving the same type of ap¬ 
propriate, high-quality care. This implies that similar 
requirements for quality assessment and assurance 
should apply across all purchasers, providers, and 
health care settings. We begin this section by discuss¬ 
ing why we believe that a comprehensive national 
strategy is needed. We then discuss the desirability of 
blending into a balanced national system an external 
quality assurance capability together with a commu¬ 
nity of health care providers who are committed to 
continuing self-assessment and improvement. 

Finally, we describe the essential elements of a 
comprehensive national strategy and discuss what is 
needed to move from the current quality assurance 
environment toward a comprehensive national strat¬ 
egy. The elements that we see as essential are national 
practice guidelines and standards of care, enhanced 
data to support quality assurance activities, improved 
approaches to quality assessment and assurance at the 
local level, and a national focus for developing, imple¬ 
menting, and monitoring a national system. Although 
components of each element exist today, it will take 
time and effort to develop, implement, and refine the 
type of comprehensive national strategy we envision. 
But much of the groundwork has already been laid. 


Reasons for a Comprehensive 
National Strategy 

We believe that a comprehensive national strategy 
is important for several reasons. The first is equity: 
the intent and stringency of quality assurance require¬ 
ments should not depend on whether the care is fi¬ 
nanced by Medicare, Medicaid, expanded employer 
mandates, or some other arrangement for coverage 
expansion. However, some variation or flexibility in 
the specific review approaches is probably warranted 
to account for differences in covered populations, 
types of services, or reimbursement methods. For ex¬ 
ample, the focus of review for a population consisting 
primarily of mothers and children might be different 
than that for predominantly middle-aged employed 
persons. Similarly, assessment methods for persons en¬ 
rolled in a prepaid group practice might concentrate 
on potential quality problems associated with 
underuse of services, while those for persons whose 
care is reimbursed on a fee-for-service basis might 
concentrate on the potential for overuse. Neverthe¬ 
less, the overall intent and stringency of review re¬ 
quirements should be similar. 

Second, health considerations dictate a comprehen¬ 
sive approach. Meeting the health care needs of indi¬ 
viduals frequently requires providing care in a variety 
of settings (that is, hospitals, physicians’ offices, nurs¬ 
ing homes, home health agencies, and so on) over an 
extended period of time. What occurs in one setting 
or at one time is often influenced by what occurred in 
a different setting at a different point in time. Thus, it 
is important to be able to track the contents, appropri¬ 
ateness, and outcomes of care for an episode of illness, 
regardless of when and where the care was provided 
or who paid for it. Most current quality assurance 
systems do not have this capability. 

Finally, certain operational aspects of quality assess¬ 
ment require a comprehensive approach. For ex¬ 
ample, many judgments about quality are based on 
patterns of care rather than isolated instances. If one 
were to examine only the patients cared for by a 
single provider and who had a common insurer or 
payment source, the number of patients might not 
be sufficient to provide an accurate assessment of that 
provider’s performance. However, by combining in¬ 
formation on care provided by a single provider 
regardless of the source of payment, more stable pro¬ 
files of care can be generated, permitting more defini¬ 
tive quality assessments. 


97 


The Need for Balance 

In general, our view is that the quality of care 
emerges most effectively from an internal commit¬ 
ment by providers to ongoing self-assessment and 
quality improvement. However, an internal commit¬ 
ment is not sufficient. There is also a need for external 
entities to monitor general levels of quality, to iden¬ 
tify areas in which improvements are needed, and to 
use appropriate means to get providers to change 
their behavior when required. 

The case for continuous quality improvement has 
been made most eloquently by Donald Berwick of the 
Harvard Community Health Plan: 

“Real improvement in quality depends ... on understanding 
and revising the production processes on the basis of data about the 
processes themselves. . . . When one is clear and constant in one’s 
purpose, when fear does not control the atmosphere (and thus the 
data), when learning is guided by accurate information and sound 
rules of inference, when suppliers of services remain in dialogue 
with those who depend on them, and when the hearts and talents 
of all workers are enlisted in the pursuit of better ways, the poten¬ 
tial for improvement in quality is nearly boundless.” 1 

However, Berwick also acknowledges the need for 
external monitoring, noting that “politically, at least, 
it is absolutely necessary for regulators to continue to 
ferret out the truly avaricious and dangerously 
incompetent.” 2 

We also believe that external reviewers have legiti¬ 
mate and necessary functions to serve. The primary 
function is overall surveillance and monitoring of the 
health care system. In addition, a number of develop¬ 
mental and technical assistance roles are essential to 
establishing a comprehensive, national quality assur¬ 
ance strategy. They include assisting providers in the 
development of quality measurement tools, aggregat¬ 
ing data on quality centrally to help providers learn 
from each other, providing technical support and 
training in the principles of quality improvement, 
encouraging and funding studies designed to expand 
the knowledge base on medical care effectiveness, and 
specifying relevant quality review criteria. 

In order to establish and maintain an appropriate 
balance, both internal and external quality assurance 
workers must do their part. External reviewers can 
adopt attitudes and strategies that acknowledge and 
encourage the efforts of individual providers to ensure 
that their patients receive quality care. For example, 
an approach that focuses on developing information 
on variations among providers in treating particular 
conditions and working with providers to reduce that 


1 D. Berwick, “Sounding Board: Continuous Improvement as an Ideal In 
Health Care,” New England Journal of Medicine, 320, (1) (1989): 54. 

2 Berwick, 54. 


variation may be more acceptable and effective than 
labeling aberrant providers as “bad” and demanding 
that they change. Providers who demonstrate that 
their behavior consistently conforms to established 
quality standards might be reviewed less frequently or 
less intensively. Similarly, such providers might be 
given an advantage as purchasers develop contracts 
with selected provider groups. On the other side, it is 
the responsibility of providers to be attentive to new 
information on health care effectiveness as it becomes 
available and to develop and maintain programs that 
demonstrably lead to continuing improvements in 
quality. 

Elements of a Comprehensive 
National Strategy 

Practice Guidelines and Standards—We believe that 
national, publicly available practice guidelines and 
standards are an essential element of a comprehensive 
quality assurance system. We use the term “practice 
guidelines” to refer to guidelines that assist in deter¬ 
mining how diseases, disorders, and other health con¬ 
ditions can most effectively be prevented, diagnosed, 
treated, and clinically managed. Nevertheless, the cir¬ 
cumstances of individual patients may justify devi¬ 
ations from practice guidelines. The term “standards” 
is used to refer to a variety of either professionally or 
statistically derived standards of quality, performance 
measures, and medical review criteria through which 
health care providers and other appropriate entities 
may assess or review the quality of health care. 

The difficulties inherent in developing such practice 
guidelines and standards should not be understated. 
For example, it is important to base guidelines and 
standards on sound scientific evidence about the effec¬ 
tiveness of medical care whenever possible and to 
allow more flexibility and variation in medical prac¬ 
tice when uncertainty exists. The development of 
practice guidelines and standards for some conditions 
and procedures is feasible. 

However, there is general agreement that the 
knowledge base on the efficacy and effectiveness of 
many aspects of medical care is weak or nonexistent. 
Here, the development of guidelines and standards 
will require additional information on medical care 
effectiveness. A mechanism for the development and 
updating of practice guidelines and standards is 
needed. Other difficulties that will have to be re¬ 
solved include specifying appropriate methods for 
developing and reviewing guidelines and standards, 
setting priorities for which guidelines and criteria to 
develop and when to update and revise existing 


98 



guidelines and standards, and pilot-testing, evaluating, 
and disseminating the guidelines and standards. 

In addition, simply developing the guidelines and 
making them public will not, by itself, ensure quality. 
For example, the New England Journal of Medicine re¬ 
cently published a study about the effect of cesarean 
section guidelines on the use of cesarean sections. 3 
Despite widespread knowledge and endorsement of 
the guidelines by the obstetricians in Ontario, Canada, 
and a belief that they had reduced their use of cesar¬ 
ean sections, actual rates of cesarean section changed 
very little after the introduction of the guidelines. 
However, the Maine Medical Assessment Foundation 
has had some notable successes in changing physi¬ 
cians’ practice patterns with a combination of educa¬ 
tion and feedback about how their practice patterns 
compare to those of their peers. 

More research and experimentation is needed on 
the effectiveness of alternative strategies for making 
guidelines available to physicians and encouraging 
them to accept them and change their behavior as 
needed. And the guidelines and standards will have to 
be incorporated into effective internal and external 
programs for assessing and assuring quality of care. 

Finally, there has been considerable discussion 
about the potential for the use of practice guidelines 
to reduce the provision of inappropriate or unneces¬ 
sary care, thereby reducing health care expenditures 
and possibly saving sufficient money to pay for an ex¬ 
pansion of coverage to persons currently uninsured. 
This is an appealing concept. Partial estimates of po¬ 
tential savings range from SI39 million in Medicare 
Part B expenditures if guidelines were used for a set 
of just eight specific procedures to about $808 million 
if practice guidelines for the same procedures were 
used by all purchasers of care. If, in addition to re¬ 
ductions in the inappropriate use of services, one 
could make reductions in the overall intensity of serv¬ 
ices, average annual savings could be $22 billion. 4 

However, some of the estimates fail to account for 
the potential cost of alternative treatments that might 
be provided in place of procedures found to be inap¬ 
propriate and the likelihood that a program intended 
to reduce inappropriate care would never be fully 
successful. Some fail to consider the possibility that 
the use of some practice guidelines might actually in¬ 
crease expenditures over the long run by increasing 
the number of services and procedures that are not 
now provided as often as they should be. For these 

3 S.L. Lomas, et al., “Do Practice Guidelines Guide Practice?" New Eng¬ 
land Journal of Medicine, 321 (1989): 1306-1311. 

4 These particular estimates were published in a technical appendix to Na¬ 
tional Leadership Commission on Health Care, For the Health of a Nation 
(Ann Arbor, Mich.: Health Administration Press, 1989). 


and other reasons, it is unclear whether potential cost 
savings might be obtained by using practice 
guidelines. 

Despite the difficulties involved in developing and 
using national guidelines and standards, the need for 
them has been recognized. The Council of Medical 
Specialty Societies, the American Medical Associa¬ 
tion, and other provider organizations have publicly 
endorsed the need for the medical profession to step 
forward and take the lead in developing guidelines 
and standards. The National Leadership Commission, 
the Physician Payment Review Commission, the Insti¬ 
tute of Medicine, and others have recommended that 
effectiveness research and guideline development be 
made a top priority. The Congress has created the 
Agency for Health Care Policy and Research within 
the Public Health Service 

“to enhance the quality, appropriateness, and effectiveness of health 
care services, and access to such services, through the establish¬ 
ment of a broad base of scientific research and through the promo¬ 
tion of improvements in clinical practice and in the organization, 
financing, and delivery of health care services.” (Public Law No. 
101-229, sec. 6(a)) 

The Agency is to accomplish this purpose by 
conducting and supporting a wide range of activities 
including research, evaluations, demonstrations, edu¬ 
cation and training, data and data base development, 
information dissemination, and development of prac¬ 
tice guidelines and standards. 

An Enhanced Data System—We believe that a data 
base that contains at least a set of minimum data ele¬ 
ments collected on each health care encounter regard¬ 
less of purchaser or setting and that integrates those 
data for analysis is an important element of a com¬ 
prehensive quality assurance system. The data should 
include information not only on the medical care pro¬ 
vided during the encounter but also on any judgments 
about quality. An enhanced data base would enable 
monitoring the quality of care provided to individual 
patients across health care settings and providers. For 
example, evaluating the outcome of a surgical inter¬ 
vention requires knowing what happened to the pa¬ 
tient after he or she left the hospital. An enhanced 
data base would also allow for the profiling of indi¬ 
vidual provider practice patterns based on care paid 
for by all purchasers rather than a single purchaser. 
Currently, these types of analyses are often not possi¬ 
ble. In addition, health and functional status informa¬ 
tion on samples of the population would be needed in 
order to track changes in the health of the population 
over time and identify variation in health outcomes 
and functional status among population groups or 
geographical areas. This would be useful in monitor- 


99 



ing the performance of the health system as a whole 
and setting national health priorities. 

For hospital care, it would be possible to build 
upon existing claims formats and fairly uniform hospi¬ 
tal discharge data across purchasers. However, for 
other settings, there is very little uniformity across 
purchasers. An area of particular concern is the lack 
of experience with obtaining detailed information 
from ambulatory care settings and particularly from 
physicians’ offices. For Medicare and some private in¬ 
surers, diagnostic data are now included on claim 
forms used for ambulatory care. This will be useful 
but still quite minimal for quality assessment purposes. 
Significant attention will have to be devoted to defin¬ 
ing an appropriate set of minimum elements for this 
type of health care encounter and to ensuring that the 
information provided is reliable and valid. The recent 
revision to the 1981 National Ambulatory Medical 
Care Minimum Data Set by the National Committee 
on Vital and Health Statistics provides a start toward 
specifying such a set of data elements. 

Even with agreement on the appropriate data ele¬ 
ments, the implementation of an integrated data 
system will not be simple. The resources required for 
collecting, processing, and maintaining this data base 
will be substantial and include both human resources 
and computer hardware and software. The integration 
of data across settings, providers, and purchasers will 
require the use of unique, common identifiers for pro¬ 
viders and purchasers as well as for patients. The data 
coming into the system must be checked regularly to 
ensure their accuracy. The data will have to be orga¬ 
nized so that all encounters for an individual patient, 
as well as all services provided by a particular pro¬ 
vider, can be easily collated and analyzed. The system 
must also be flexible enough to accommodate the in¬ 
evitable changes and improvements in data and qual¬ 
ity assessment methods that will come with time. 
Safeguards for privacy and confidentiality will also 
need to be addressed. 

An Improved System of Local Review—Our reviews 
of the literature as well as the results of some quality 
review programs leave little doubt that significant 
numbers of patients are currently receiving inap¬ 
propriate or poor-quality care. For example, in past 
studies, we have cited estimates of rates of inappropri¬ 
ate use of surgical procedures ranging from 14 to 32 
percent as well as rates of inappropriate hospital ad¬ 
missions ranging from 7 to 19 percent. 6 In addition, 
our evaluations of current quality assurance programs 
suggest that those programs are not identifying signifi- 


5 General Accounting Office, Medicare: Improvements Needed in the Identi¬ 
fication of Inappropriate Hospital Care, GAO/PEMD-90-7 (Washington, 
D.C.: December 20, 1989), 3-4. 


cant proportions of cases with potential quality prob¬ 
lems. For example, SuperPRO regularly reviews a 
random sample of Medicare cases previously re¬ 
viewed by PROs and typically questions the appropri¬ 
ateness of hospital admission in almost six times as 
many cases as the PROs. 6 Similarly, our review of 
the initial screening of cases in military hospitals for 
occurrences indicating potentially substandard care 
found that many such occurrences were missed in the 
initial screening process. 7 

Despite the importance of continuous quality im¬ 
provement strategies in the long run, our past work 
has shown that improvements in external quality as¬ 
surance mechanisms are needed in order to achieve 
the goal of appropriate, high-quality medical care for 
all Americans. We believe that there are a number of 
key components for improving the conduct of quality 
assurance within the framework of a comprehensive, 
national strategy. First, the quality assurance activities 
need to be conducted by local review entities that are 
held accountable for identifying instances of poor 
quality and improving overall patterns of care within 
their geographical area. Second, the local review enti¬ 
ties should have available a uniform set of methods 
for reviewing care (including practice guidelines and 
standards), developing and implementing interventions 
and reporting information on the results of reviews 
and interventions. Finally, a national organization is 
needed to develop the national guidelines and review 
methods and to coordinate and oversee the activities 
of the local review entities. 

By local review entities we mean organizations that 
are close enough to the local health care community 
that appropriate recognition of the unique circum¬ 
stances of the community can be made and that the 
type of balanced quality assurance system we advo¬ 
cated earlier can be fostered and maintained. The 
state-level PRO program is one organizational model 
that approximates this goal. The individual PROs are 
charged with ensuring that the care provided to 
Medicare beneficiaries is appropriate and of high 
quality and, at the same time, with maintaining a posi¬ 
tive, cooperative relationship with the provider 
community. 

Greater uniformity and effectiveness in review 
methods, intervention approaches, and reporting of 
results will be necessary in order to ensure that all pa¬ 
tients are receiving an equally high level of quality. 
However, moving toward greater uniformity is not 
meant to imply that all reviews must be identical. 


6 General Accounting Office, Medicare, 3. 

7 General Accounting Office, DOD Health Care: Occurrence Screen Pro¬ 
gram Undergoing Changes but Weaknesses Still Exist, GAO/HRD-89-36 
(Washington, D.C.: January 5, 1989). 


100 




Some flexibility is needed to tailor review methods 
and interventions to specific situations. For example, 
generally speaking, reviewing the appropriateness of a 
hospital length of stay would be reasonable. How¬ 
ever, since the Medicare Prospective Payment System 
reimburses hospitals a set amount regardless of the 
length of stay, the incentive for hospitals is to release 
patients earlier rather than later. Therefore, the 
review of the appropriateness of a hospital discharge 
under Medicare generally focuses on the possibility 
that premature discharge has occurred rather than on 
inappropriate days at the end of the stay. 

A variety of existing methods of quality assessment 
could serve as the core of the common review ap¬ 
proaches. Reviews could be done prior to care being 
received (prospective review) that typically focus on 
the need for particular procedures, the appropriate¬ 
ness of the proposed setting (often the hospital), and 
the proposed length of stay. The limited informa¬ 
tion available suggests that these reviews are cost- 
effective. 

Reviews could be done while the care is being de¬ 
livered (concurrent review) and would typically focus 
on the need for continued care but might also address 
a lack of expected progress or improvement. This 
type of review tends to be expensive and is often lim¬ 
ited to potentially high-cost cases. 

Reviews could be done after the care is completed 
(retrospective reviews) that examine the process and 
outcomes of care based on information contained in 
the medical record or on the claims form. Reviews 
based on the medical records are relatively expensive 
but can address a wide range of appropriateness and 
quality concerns, including both overuse and 
underuse. 

Reviews could be done of aggregate data from 
either claims or medical records (profiling; small area 
variation analysis) that focus on identifying providers 
who differ in one way or another from their peers in 
their process or outcome of care. These could be used 
to target both prospective and retrospective reviews. 

Reviews could be done of prescription drug use, 
prospectively or retrospectively, that focus on ensur¬ 
ing appropriate use and limiting adverse reactions and 
also allow the targeting of educational and other 
interventions for both patients and providers. 

Similarly, a number of intervention approaches that 
have been tried could serve as the basis for develop¬ 
ing a uniform set of interventions for use by local 
review entities. 


One approach is that of undertaking educational 
interventions aimed at providing the medical commu¬ 
nity with information on the appropriate uses and 
costs of various medical services. The evidence on the 
effectiveness of this approach in changing provider 
behavior is mixed. 

Another is to provide feedback of review results to 
providers, either on individual cases or on aggregate 
practice patterns. While generally viewed as more 
effective than simple educational interventions, its use¬ 
fulness has been limited by the unavailability of com¬ 
prehensive data across purchasers and settings. 

Yet another approach consists of restrictions on 
providers’ use of particular services (such as the total 
number of laboratory tests) or on their practice (such 
as hospital or operating room privileges). Restrictions 
have sometimes been met with resistance and often 
change behavior only as long as they remain in place. 

One more approach is to offer incentives (such as 
increased reimbursement, more patients, reduced 
administrative requirements) for providers to conform 
to particular standards of medical practice. These are 
being increasingly used, particularly in managed care 
organizations such as preferred provider organizations 
and health maintenance organizations. 

Last, monetary sanctions can be imposed or pro¬ 
viders can be excluded from the program (as in the 
Medicare program) if they provide poor-quality care 
and are unwilling or unable to change their practice 
patterns. 

Additional development, experimentation, and eval¬ 
uation of both assessment and intervention techniques 
will be needed in order to create an effective, com¬ 
prehensive, national strategy. 

Finally, even though some flexibility in the imple¬ 
mentation of reviews and interventions is necessary, a 
common set of reporting requirements, and particu¬ 
larly reporting categories, will be needed in order to 
oversee and evaluate the quality assurance activities at 
a national level. One of the greatest weaknesses of the 
current system of quality assurance is that there is no 
simple way to compare information on quality of care 
from one program to another or to monitor changes 
in levels of quality over time. This is another area in 
which developmental work is needed. 

A National Organizational Focus—We believe a na¬ 
tional organizational focus is required to accomplish 
the many developmental, implementation, and evalua¬ 
tion tasks needed to set up and operate a comprehen- 


101 


sive, national system of quality assurance. Some of 
the developmental tasks have been alluded to above— 
supporting research on the effectiveness of medical 
care and developing improved quality assessment and 
assurance techniques. Others include developing prac¬ 
tice guidelines and standards, uniform reporting re¬ 
quirements for both medical data and data on the 
results of quality reviews, and methods of changing 
provider behavior, including approaches for fostering 
internal quality assurance activities. Implementation 
will require the development and oversight of local 
review organizations that have the necessary tools 
and skills in data integration and analysis, quality as¬ 
sessment, and quality assurance. Finally, the national 
organization will also require considerable expertise in 
data analysis, evaluation, and management in order to 
integrate the information coming from the various 
local review entities into a national picture of health 
care quality, to evaluate the performance of the local 
review entities, and to identify areas in which greater 
attention to quality is needed. 


The Role of Provider Accreditation and 
Certification 

Most of the discussion of quality assurance to this 
point pertains to the review of care provided to indi¬ 
vidual patients. However, it is also important to 
review the credentials, facilities, staff, and administra¬ 
tive procedures of health care providers (so-called 
“structural” quality assurance) to determine a pro¬ 
vider’s capability or potential for providing high qual¬ 
ity care. While such review cannot ensure that quality 
care is actually provided, it is important for ensuring 
that at least the necessary elements for providing 
quality care exist and that providers without those 
elements are not allowed to participate. 

Established accreditation or certification programs 
exist for hospitals, nursing homes, and many ambula¬ 
tory care settings. However, one setting in which 
little review of this type occurs is the individual phy¬ 
sician’s office. We believe that such review may be 
particularly important for physicians who do not have 
hospital admitting privileges and who are not part of 
a larger medical network through which their care 
might be scrutinized. For selected physicians in this 
category, on-site visits might be warranted to ensure 
that medical records are legible, integrated, and filed; 
that X-ray and laboratory equipment is properly cali¬ 
brated, maintained, and used; and that the process of 


care (as revealed through a review of patients’ 
records) is appropriate and high in quality. 


The Importance of Consumer Education 

Expanding access to care may bring some patients 
into the traditional health care system for the first 
time. They will need assistance in learning to access 
the system appropriately, select primary care physi¬ 
cians, and understand the importance of an ongoing 
relationship with an “accountable” provider. Pro¬ 
viders will need assistance in working with these new 
patients and helping them to use the system wisely. 
All consumers will need assistance in using the in¬ 
creasingly available information on the appropriate¬ 
ness and quality of care to make prudent choices 
among providers. 


Conclusion 

We believe that a comprehensive national quality 
assurance strategy is needed in order to ensure that all 
Americans receive high-quality medical care. A com¬ 
prehensive national strategy is important for several 
reasons: (1) to ensure that the treatment of individuals 
does not depend on how the care is financed; (2) to 
be able to examine the contents, appropriateness, and 
outcomes of care, regardless of when and where the 
care was provided or who paid for it; and (3) to meet 
the legitimate needs for information on quality of the 
many different actors in the health care system. 

We see four essential elements of a comprehensive 
national strategy: 

• national practice guidelines and standards of care, 

• enhanced data to support quality assurance 
activities, 

• improved approaches to quality assessment and 
assurance at the local level, and 

• a national focus for developing, implementing, 
and monitoring a national system. 

We believe that the basic elements necessary to 
move toward a comprehensive national strategy cur¬ 
rently exist. However, additional time and resources 
will be required to fully develop, implement, and 
evaluate the components that will make the system 
truly effective. The understanding and cooperation of 
health care providers, purchasers, consumers, and pol¬ 
icymakers are also essential. 


102 


APPENDIX I—EXPERT PANEL ON 
QUALITY ASSURANCE ISSUES 

Robert Brook, M.D., Sc.D. 

Deputy Director, Health Program 
The Rand Corporation 

John W. Bussman, M.D. 

Medical Director 

Oregon Medical Professional Review Organization 

Robert Keller, M.D. 

Executive Director 

Maine Medical Assessment Foundation 

Kathleen N. Lohr, Ph.D. 

Senior Professional Associate 
Institute of Medicine 
National Academy of Sciences 

Barbara Matula 
Director 

North Carolina Division of Medical Assistance 

Michael R. McGarvey, M.D. 

Corporate Vice President, Health Affairs 
Empire Blue Cross and Blue Shield 

Leslie Michelson 

President and Chief Executive Officer 
Value Health Sciences, Inc. 

R. Heather Palmer, M.B., B.Ch., S.M. 

Department of Health Policy and Management 
Harvard School of Public Health 

Gerald Plotkin, M.D. 

Medical Director, Medical Groups Division 
Harvard Community Health Plan 

Cary Sennett, M.D., M. Phil. 

Medical Director and Director of 
Technology Assessment 
AETNA Life and Casualty 

Michael Stocker, M.D. 

Executive Vice President 
U.S. Health Care 

Leon Wyszewianski, Ph.D. 

Department of Health Services Management and 
Policy 

The University of Michigan School of Public Health 
Edward Zalta, M.D. 

Chairman of the Board and Chief Executive Officer 
Capp Care 


APPENDIX II—MAJOR CONTRIBUTORS 
TO THIS REPORT 

Program Evaluation and 
Methodology Division 

Linda Demlo, Assistant Director for Program 
Evaluation in Human Services Areas 
Roger Straw, Project Manager 


Related GAO Reports 

Medicare: Improvements Needed in the Identification of 
Inappropriate Hospital Care (GAO/PEMD-90-7, 
December 20, 1989). 

Medicare: Assuring the Quality of Home Health Services 
(GAO/HRD-90-7, October 10, 1989). 

VA Health Care: Improvements Needed in Procedures to 
Assure Physicians Are Qualified (GAO/HRD-89-77, 
August 22, 1989). 

Health Care: Initiatives in Hospital Risk Management 
(GAO/HRD-89-79, July 18, 1989). 

Prescription Drugs: Information on Selected Drug Utili¬ 
zation Review Systems (GAO/PEMD-89-18, May 
24, 1989). ' 

DOD Health Care: Occurrence Screen Program Under¬ 
going Changes but Weaknesses Still Exist (GAO/ 
HRD-89-36, January 5, 1989). 

Medicare: An Assessment of HCFA's 1988 Hospital 
Mortality Analyses (GAO/PEMD-89-11BR, De¬ 
cember 13, 1988). 

Medicare PROs: Extreme Variation in Organizational 
Structure and Activities (GAO/PEMD-89-7FS, No¬ 
vember 8, 1988). 

VA Hospital Care: A Comparison of VA and HCFA 
Methods for Analyzing Patient Outcomes (GAO/ 
PEMD-89-29, June 30, 1988). 

Medicare: Improved Patient Outcome Analyses Could 
Enhance Quality Assessment (GAO/PEMD-88-23, 
June 27, 1988). 

Medicare: Improving Quality of Care Assessment and 
Assurance (GAO/PEMD-88-10, May 2, 1988). 

VA Health Care: Assuring Quality of Care for Veterans 
in Community and State Nursing Homes (GAO/ 
HRD-88-18, November 12, 1987). 

Medicare: Preliminary Strategies for Assessing Quality of 
Care (GAO/PEMD-87-15BR, July 10, 1987). 

Medicare: Reviews of Quality of Care at Participating 
Hospitals (GAO/HRD-86-139, September 15, 
1986). 


103 














































































































PRIMARY CARE SERVICE DELIVERY PROGRAMS— 
A CRITICAL ELEMENT TO ENSURING ACCESS 
TO CARE 


Bonnie Lefkowitz and Judy Rodgers * 


EXECUTIVE SUMMARY 

During the past twenty-five years the nation’s 
health care system has undergone tremendous growth 
in resource capacity, sophistication of medical tech¬ 
nology, and insurance coverage of the formerly unin¬ 
sured. The health care system has achieved major 
successes: Americans are living longer, infant mortal¬ 
ity has dropped, and even such chronic diseases as 
hypertension are declining. But as the health system 
has grown, paradoxes have emerged and gaps in 
access to care have actually widened. These para¬ 
doxes have left large numbers of people without 
access to appropriate health care either because they 
lack insurance, live in communities without sufficient 
health resources, have special needs not met by tradi¬ 
tional medical care, or face other barriers such as 
race, language, or culture. As Lisbeth Schorr notes, 
“The way health care is organized and paid for in the 
United States has produced many phenomenal medi¬ 
cal achievements but . . . within the overall success 
story lie hidden failures.” 

Financing reforms can contribute significantly to 
elimination of barriers to adequate health care. How¬ 
ever, financing does not obviate the need for delivery 
programs. The purpose of this paper is to discuss the 
service delivery component of a comprehensive ap¬ 
proach to ensure access to care and improved health 
status for underserved populations. The paper focuses 
on access to primary care—that is, first line outpatient 
services provided in an office or clinic by a physician 

* Report prepared by Bonnie Lefkowitz and Judy Rodgers, Bureau of 
Health Care Delivery and Assistance. Health Resources and Services Admin¬ 
istration, U.S. Public Health Service, March 1990. 

Points of view or opinions expressed in this document are those of the au¬ 
thors and do not necessarily represent the official position or policies of the 
U.S. Department of Health and Human Services. 

The authors wish to acknowledge the research assistance of Irene Buskin, 
Norma Campbell, and Lynn Spector. 


or midlevel practitioner. It also argues for the provi¬ 
sion of a wide range of facilitating services such as 
community outreach, case-management of secondary 
and tertiary medical care, and integration of tradi¬ 
tional medical services with health, social, and wel¬ 
fare services. 

This paper describes barriers to the receipt of 
appropriate primary care, explains ways in which spe¬ 
cific population subgroups experience these barriers, 
defines and evaluates the effectiveness of existing pri¬ 
mary care service delivery programs, and finally, pro¬ 
poses a framework for future reform. 

Barriers to Care. Nearly 32 million Americans are 
uninsured and many more are underinsured. In addi¬ 
tion to financial barriers, nonfinancial barriers still 
prevent many people from receiving effective primary 
care. Specifically, 33 million persons live in Federally 
designated Health Manpower Shortage Areas; 16 mil¬ 
lion in isolated rural communities and 17 million in 
disadvantaged urban areas, where there is a dearth of 
health care facilities, personnel, and other resources 
needed for the routine provision of services at the 
local level. An estimated 26 million persons do not 
have a regular private sector primary care physician. 
Additionally, even if facilities and services are avail¬ 
able, they are often fragmented (i.e., offered through 
multiple organizations in various locations) and 
poorly coordinated. Finally, there are language, 
racial, educational, cultural, and attitudinal differences 
which impose special barriers to effective delivery of 
health and social services. 

Groups Affected by These Barriers. There are numer¬ 
ous population subgroups that experience barriers to 
the receipt of appropriate primary health care. A dis¬ 
proportionate share of those facing these barriers are 
poor and minority. Additional special population 


105 



groups that experience particular hurdles to the re¬ 
ceipt of care include, among others, high risk preg¬ 
nant women and their infants, migrant farm workers, 
individuals with HIV infections, substance abusers, 
and the elderly. Of course many individuals fall into 
more than one of these population groups. 

Existing Comprehensive Primary Care Programs. 
There are several types of subsidized service delivery 
programs that serve those individuals who lack a reg¬ 
ular private sector primary care physician. At the 
Federal level, the Bureau of Health Care Delivery 
and Assistance is responsible for programs which 
bring community-based primary health care to ap¬ 
proximately six million poor and underserved persons 
through grants and manpower recruitment. The 
Indian Health Service provides primary care services 
through a variety of urban and rural programs to 
over one million persons per year. Two Federal 
Grant programs (the Maternal and Child Health Serv¬ 
ices Block Grant, and the Preventive Health and 
Health Services Block Grant) help support primary 
care services to underserved populations, usually pro¬ 
vided through State and local health departments. 
Approximately 25 percent of local health departments 
have gone beyond offering discrete single health serv¬ 
ices, and now provide primary care. Hospitals are the 
only family doctor in many areas, in that underserved 
persons often rely on hospital emergency rooms or 
organized outpatient departments as their principal 
source of primary care. School-based health centers 
offer primary health care, through 150 health centers 
operating in junior and senior high schools in both 
urban and rural areas. Finally, the private sector helps 
to serve vulnerable populations by subsidizing over 
500 private, non-publicly funded health centers 
throughout the country. 

Effectiveness of Existing Programs A number of 
studies have shown that existing primary care pro¬ 
grams have made significant inroads in reducing bar¬ 
riers to the receipt of appropriate health care, and 
improving health status and outcome. For example, 
the effectiveness of community-based health centers is 
evidenced by the fact that Medicaid patients who use 
these centers have lower hospital admission rates, 
shorter lengths of stay, and make less inappropriate 
use of emergency rooms than similar patients who use 
Medicaid but not a community health center. Simi¬ 
larly, health centers have had a beneficial effect on 
both white and black infant mortality rates, have re¬ 
duced rheumatic fever and untreated middle ear infec¬ 
tions, and have brought about an increase in the 
number of immunized children. Unfortunately, most 
of the research in this area was conducted in the 
1970s and early 1980s. 


Future Directions. Service delivery programs effec¬ 
tively target their services to underserved, vulnerable 
populations by offering an optimal continuum of ac¬ 
tivities. First, they ensure the presence of providers 
and facilities and offer comprehensive primary medi¬ 
cal care. Second, they provide case management, and 
where possible, co-location of a broad range of 
health, welfare, and other support services. Third, 
they include outreach and other social services which 
foster health prevention and promotion behavior, en¬ 
courage early entry into the health and social service 
system, and encourage at-risk populations to maintain 
participation in care. Examples of such services in¬ 
clude health education programs, transportation and 
home visiting, on-site day care, and bilingual services. 
Finally, effective programs are community-based and 
community-responsive, addressing unique local cir¬ 
cumstances and health care problems. 

Expanding health care insurance coverage should 
reinforce—not replace—support for primary care de¬ 
livery systems. Depending on their design, financing 
reforms can increase the capacity of direct delivery 
providers. If insurance covers patients previously un¬ 
insured or underinsured, delivery systems can then 
use their State, Federal or private funds to develop 
additional facilities, to expand types of services and 
the number of patients served at existing facilities, and 
to provide additional outreach and case management 
services. Thus insurance and service delivery ap¬ 
proaches to ensuring access to care are synergistic. 


THE PROBLEM—BARRIERS TO CARE 

Barriers to the receipt of primary care are varied, 
but can generally be categorized into the groups de¬ 
scribed below. It is important to note that many indi¬ 
viduals who lack access to appropriate health care 
have problems that fall into more than one of these 
categories. 


Financial Barriers 

While this paper emphasizes service delivery issues, 
these problems are exacerbated by financial barriers to 
access which limit the care available to poor people, 
and place added burdens on the service delivery pro¬ 
grams that are available to this population. Indeed, 
31.8 million Americans lacked health insurance, either 
public or private, in 1987 (the most recent year for 
which data is available). 1 While some are young and 

1 Bureau of the Census, Current Population Survey (Washington, D.C.: 
March 1988). 


106 



healthy (e.g., college graduates who have not yet re¬ 
placed their parents’ health insurance with their own), 
most are poor. Additionally, many other persons are 
underinsured—that is, their public or private insur¬ 
ance does not cover important services, especially 
preventive and primary care. For example, Medicare, 
which requires 20 percent patient payment for outpa¬ 
tient services, excludes preventive services such as 
Pap smears. 2 


Capacity/Resource Barriers 

As discussed below, there are many people who 
lack access due to insufficient facilities, personnel, and 
other resources needed for the routine provision of 
services at the local level. In certain geographic 
areas—mainly rural and inner city areas, there is a 
dearth of health care resources and personnel. In 
1988, 33 million people (17 million urban and 16 mil¬ 
lion rural) were living in Health Manpower Shortage 
Areas (HMSAs). 3 Not all of these individuals experi¬ 
ence access problems, but there is a great deal of 
overlap with the estimated 26 million persons who 
lack a regular private sector primary care physician. 4 

Isolated Rural Areas—Rural residents lag behind 
the rest of the country in access to health care. There 
are roughly one-half as many physicians in rural areas 
as there are in urban areas—97.9 vs. 174.7 per 100,000 
population. Rural counties with a population of less 
than 10,000 had only 53 physicians per 100,000 popu¬ 
lation in 1985, and in counties with fewer than 2,500, 
this ratio fell to 29.9. 5 Physician availability in rural 
areas is expected to worsen even further in the next 
few years due to an expected 25 percent rate of physi¬ 
cian retirement and severe cutbacks in the National 
Health Service Corps Scholarships program, which 
supplies physicians to HMSAs. 6 The Nation has 1,955 
HMSAs (areas with a primary care physician to popu¬ 
lation ratio of less than 1 to 3,000), and a total of 
4,224 primary care physicians is needed to bring all 
these areas up to the designation threshold. In 1990 
there are a total of approximately 1,000 obligated 
NHSC physicians, of which 120 are newly available 
scholars. This contrasts dramatically with 1986, when 


2 The Bureau of Health Care Delivery and Assistance, Health Resources 

and Services Administration, U.S. Public Health Service, "The Bureau cf 
Health Care Delivery and Assistance’s Unique Role in Primary Care,’ 
(Washington, D.C.: December 1988), 9. __ 

3 The Bureau of Health Care Delivery and Assistance, “The Bureau s 

Unique Role,” 9. 

4 L.H. Aiken, C.E. Lewis, J. Craig, R.C. Mendenhall, R.J. Blendon, and 
D.E. Rogers, "The Contribution of Specialists to the Delivery of Primary 
Care: A New Perspective,” New England Journal of Medicine (June 4, 1979). 

5 David A. Kindig, and Hormoz Movassaghi, The Adequacy of Physician 

Supply in Small Rural Counties,” Health Affairs 8 (2) (Summer 1989): 66. 

8 Larry S. Patton, The Rural Health Challenge, Staff Report to the Special 

Committee on Aging, U.S. Senate (Washington, D.C.: Government Printing 

Office, 1988), 52-53. 


there were 2,600 scholarship obligated physicians of 
which 1,400 were newly obligated. Isolation, over¬ 
work, lack of professional contact and low economic 
viability all contribute to difficulties in attracting new 
providers to rural areas voluntarily. 

Also, beyond personnel issues, there are other prob¬ 
lems related to low geographic density, such as insuf¬ 
ficient population to support facilities and modem 
technology. The closure or cutback of many rural 
hospitals affects the availability of primary care di¬ 
rectly as well as the ability of rural areas to attract 
providers. 

Disadvantaged Urban Areas—The 17 million urban 
residents living in HMSAs are primarily in the inner 
cities. The overall adequate or excess supply of physi¬ 
cians in urban regions masks problems in poor, often 
minority areas within them. In ten cities the number 
of office-based physicians per 100,000 population in 
poor areas declined from 136 in 1963 to 127 in 1980, 
while in non-poverty areas their number grew from 
131 to 150. 7 

Reasons that physicians may not practice in these 
areas include concerns about inadequate facilities and, 
perhaps, a reluctance to serve the poor and minority 
populations concentrated there. Because of the high 
percentage of Medicaid and uninsured patients in 
inner cities, it also may be more difficult to maintain 
an economically viable practice in these areas. Other 
providers may locate their practices in urban areas 
but are not necessarily willing to treat the poor and 
minority groups. 8 


Operational/Organizational Barriers 

Even if the physical/structural resources are in 
place, underserved populations face barriers related to 
the operation and organization of services—such as 
inadequate transportation to primary care sites, diffi¬ 
culties in arranging child care, unpleasant sur¬ 
roundings, long waiting times, inconvenient hours of 
operation (causing excessive time lost from work), 
and lack of integration among the various programs 
serving high-risk, hard to reach population groups. 9 


7 The Bureau of Health Care Delivery and Assistance, “The Bureau’s 
Unique Role,” 10. 

8 President’s Commission for the Study of Ethical Problems in Medicine 
and Biomedical and Behavioral Research, Securing Access to Health Care: The 
Ethical Implications of Differences in Availability of Health Services, Vol. 1: 
Report (Washington, D C.: Government Printing Office, March 1983), 83-86. 

9 Institute of Medicine, Prenatal Care: Reaching Mothers, Reaching Infants, 
Summary and Recommendations (Washington, D.C.: National Academy 
Press), 6-7. 


107 




Case management of primary, specialty and inpa¬ 
tient services combined with other social and support 
services can make the health care system more effec¬ 
tive for everyone but are particularly important for 
the poor and underserved. Among the services 
needed are those relating to eligibility determinations 
for health financing, mental health, substance abuse, 
runaway youth, infant day care, child abuse and ne¬ 
glect, welfare programs, nutrition, family planning, 
housing, transportation, labor practices, correctional 
programs, and legal services. Although these services 
are typically available through multiple organizations, 
local agencies often lack adequate personnel, materi¬ 
als, or knowledge of other programs to make referrals 
or other coordination efforts, such as arranging for 
co-location of services. The problem is exacerbated in 
rural areas, where the physical facilities that house 
necessary services are geographically dispersed, thus 
complicating integration of service delivery. In addi¬ 
tion, a multiplicity of eligibility requirements, and 
multiple sites for needs-determination procedures 
complicate the ability to access services. Finally, ri¬ 
valries among different disciplines and organizations 
can fragment provider responsibility. This inability to 
integrate services means that those least able to do so 
must grapple with the most “red tape” and barriers to 
receiving care. 10 


Cultural/Social Barriers 

Oftentimes, language, racial, educational, behav¬ 
ioral, environmental and attitudinal differences impose 
special barriers to effective delivery of health and 
social services. Health care professionals may lack 
necessary skills, such as language training, health edu¬ 
cation, and training in the provision of preventive 
services, or may be insensitive to cultural differ¬ 
ences. * 11 For many population groups, individual, 
family, and community behavior patterns can affect 
the pursuit of appropriate care in a timely fashion. As 
an example, one-third of the women in the U.S. do 
not receive adequate prenatal care, of which the high¬ 
est proportion are black, Hispanic, poorly educated, 
low-income, unmarried, and/or teenaged. 12 Fear or 
lack of knowledge is often a barrier to care for these 
women, who are twice as likely as those who receive 
prenatal care to have a low-birth weight baby. 13 Fi¬ 


10 William White, consultant to the Bureau of Health Care Delivery and 
Assistance, Department of Health and Human Services, “Draft Report pre¬ 
pared for the Subcommittee on Community Based Health and Social Serv¬ 
ices, White House Task Force on Infant Mortality” (1989), 9. 

11 William Gorham, Delivery of Health Services for the Poor, U.S. Depart¬ 
ment of Health and Human Services (Washington, D.C.: December, 1967), 
257. 

12 Gold, Kenney, and Singh, Blessed Events and the Bottom Line: Financing 
Maternity Care in the United States (New York: The Alan Guttmacher Insti¬ 
tute, 1987), 14-16. 

13 Gold, Kenney, and Singh, Blessed Events, 14-16. 


nally, exposure to environmental toxins or hazards, 
such as lead, also influence pregnancy and other 
health outcomes. 14 


HOW GROUPS ARE AFFECTED BY 
THESE BARRIERS 

There are numerous population subgroups that ex¬ 
perience barriers to the receipt of care. A dispropor¬ 
tionate share of those facing the barriers described 
above are poor and minority. In addition, there are 
smaller, frequently overlapping subgroups who are 
disproportionately poor or minority and who also 
face their own unique hurdles to accessible care. 


The Poor 

The Robert Wood Johnson Foundation found in a 
recent study that lack of accessible care is largely a 
problem of the poor. Specifically, access to health 
care showed marked improvement from the 1950s to 
1982, when the gap between rich and poor was clos¬ 
ing. Unfortunately, since 1982 this gap has widened, 
reducing access to care among the poor. For example, 
the adult poor below the age of 65 had 30 percent 
fewer ambulatory visits per person in 1986 than in 
1982. The widening gap is due to financial barriers 
(i.e., increasing lack of health insurance) as well as 
nonfinancial barriers (e.g., maldistribution of re¬ 
sources, logistical and lifestyle barriers). 15 The impact 
of the nonfinancial barriers is noted by a recent study 
showing that among insured adults, the poor are 4.4 
times as likely as those who are not poor to have 
needed medical services but not to have received 
them. 16 

There are approximately 32 million Americans with 
incomes below the poverty line. 17 The poor are less 
likely than the non-poor to have private medical cov¬ 
erage or medical coverage through their workplace. 
One-half of the 31.8 million people who lack health 
insurance have incomes below 150 percent of the pov¬ 
erty level. Populations in this group include pregnant 
women and infants, children, and other uninsured per- 

14 Department of Health and Human Services, “Facts on Infant Mortality 
and Access to Prenatal Care” (unpublished information distributed on Child 
Health Day, Washington D.C.: 1989). 

15 The Bureau of Health Care Delivery and Assistance, “The Bureau’s 
Unique Role,” 8. 

16 Rodney A. Hayward, M.D., Martin F. Shapiro, M.D., Ph.D., Howard 
E. Freeman, Ph.D., and Christopher R. Corey, M.A., “Inequities in Health 
Services Among Insured Americans,” New England Journal of Medicine (June 
9, 1988): 1507. 

17 Jane Koppelman, National Health Policy Forum, The George Washing¬ 
ton University, Poverty and the Underclass: Priorities for the Next Decade, Issue 
Brief No. 511 (Washington, D.C.: 1989), 2. 


108 




sons such as the working poor, who are not eligible 
for Medicaid but have no private insurance. Nation¬ 
wide, Medicaid reaches fewer than half the poor, and 
even fewer of the employed poor. In fact, fear of 
losing Medicaid’s protection may be an incentive to 
remain unemployed, thus perpetuating the poverty 
cycle. 18 


Minorities 

There are 60 million members of minority groups 
(blacks, Hispanics, Native Americans, and Asian 
Americans), a disproportionate percentage of whom 
are low income. Thus, they are likely to face access 
problems related to poverty, as well as additional bar¬ 
riers arising from location in the inner city, dis¬ 
crimination, and other socio-economic and cultural 
factors. 19 For example, researchers Janet Mitchell 
and Rachel Shurman found that, controlling for other 
factors, obstetricians were less likely to participate in 
Medicaid in counties with high minority populations. 
The same was not true for surgeons or general practi¬ 
tioners, causing speculation as to whether it was the 
prospect of continuing and frequent contact with pa¬ 
tients that led to the difference. Mitchell and Shurman 
also noted that many doctors have expressed a will¬ 
ingness to treat the poor in a public clinic or outpa¬ 
tient department for a few hours a week, but not in 
their own offices, where their private patients might 
be uncomfortable. 20 

The impact of these non-financial barriers on mi¬ 
nority populations is demonstrated by the fact that 
among insured, working age adults, blacks are 1.7 
times as likely as whites to need medical services but 
not to receive them. Similarly, Hispanics with a medi¬ 
cal illness are 2.2 times as likely as whites not to have 
seen a physician within the past year. 21 

As a result of financial as well as nonfinancial bar¬ 
riers to care, there are significant gaps in health status 
between minorities and the rest of the nation. Specifi¬ 
cally, in virtually every measure of health status (e.g. 
life expectancy, death rate, infant mortality rate, and 
the prevalence of coronary and cerebrovascular dis¬ 
ease), minorities, particularly blacks and Hispanics, 
are significantly worse off than whites. 22 

18 The Bureau of Health Care Delivery and Assistance, "The Bureau’s 
Unique Role,” 9. 

19 President’s Commission Report, 83-86. 

20 Janet B. Mitchell and Rachel Shurman, “Access to Private Obstetrics/ 
Gynecology Services under Medicaid,” Medical Care, 22 (11) (November 

1984): 1034. . . „ , . _ 

21 Hayward, Shapiro, Freeman, and Corey, “Inequities in Health Serv¬ 
ices,” 1507. „ ... 

22 Office of Disease Prevention and Health Promotion, U.S. Public Health 
Service, U.S. Department of Health and Human Services, Disease Prevention/ 
Health Promotion: The Facts, (Palo AJto, Calif.: Bull Publishing Company, 
1987), 198, 202. 


High Risk Pregnant Women and Their Infants 

In 1988, the provisional infant mortality rate in the 
United States was 9.9 deaths within the first year per 
1,000 live births. The rate for black infants was nearly 
twice that. In 1987 the black infant mortality rate 
(17.9 per 1,000) was at the same level as the white 
rate had been 25 years earlier. Although the U.S. rate 
is better than ever, 21 nations have lower rates. 23 

There has been a troubling slowdown in the rate of 
decline in infant mortality observed in the 1980s. 
During the 1970s, the rate declined by 4.9 percent per 
year for whites and 4.1 percent per year for blacks. In 
1987, the black infant mortality rate declined by less 
than 1 percent for the third year in a row. The white 
infant mortality rate declined by 3.6 percent. 24 Worse 
yet, in 1987, the black fetal death rate increased by 2.7 
percent, the first increase since the 1960s. White fetal 
death rates decreased by only 1.6 percent. 25 

The rate of progress has slowed primarily because 
factors associated with increased risk of infant death, 
such as low birth weight and lack of access to pre¬ 
natal care, have shown no improvement in recent 
years. 26 The importance of prenatal care is demon¬ 
strated by the fact that women who get insufficient 
prenatal care have double the risk of having a low 
birth weight baby, and give birth to babies that are 
three times more likely to die in infancy. 27 In 1980, 
low birthweight infants represented less than seven 
percent of all newborns in the United States, but 
accounted for sixty percent of all babies who died in 
infancy. 28 

Many pregnant women experience a combination of 
the financial, organizational, and cultural barriers de¬ 
scribed above. They are particularly affected by lack 
of providers, exacerbated by the fact that some physi¬ 
cians are no longer practicing obstetrics, in part due 
to the cost of liability insurance. Lack of coordination 
among health and social services also has a significant 
impact on low-income pregnant women, who are ill- 
prepared to visit numerous locations in search of 
needed services. For example, services under the Spe¬ 
cial Supplemental Food Program for Women, Infants, 
and Children (WIC) are often not provided in con¬ 
junction with prenatal care. 


23 White House Task Force on Infant Mortality, Draft Report, “Infant 
Mortality in the United States,” (Washington, D.C.: October 29, 1989), 3. 

24 White House Task Force, Draft Report, 3. 

25 White House Task Force, Draft Report, 4. 

28 White House Task Force, Draft Report, 3. 

2 7 Office of Disease Prevention and Health Promotion, The Facts, 134. 

28 Congress of the United States, Office of Technology Assessment, 
Healthy Children: Investing in the Future, OTA-H-345 (Washington, D.C.: 
Government Printing Office, February' 1988), 6. 


109 




Migrant Farmworkers 

The nation’s three million migrant and seasonal 
farmworkers and their families share some needs with 
other indigent people, but these are compounded by 
special hazards of farmwork, such as pesticide expo¬ 
sure and accidents, combined with language, mobility 
and other barriers to care. Migrant workers are rarely 
covered by Medicaid because of residency require¬ 
ments or by private insurance because of the nature of 
their employment. They often work in rural, isolated 
communities where there are few providers to begin 
with. Those providers who are present tend to be 
physicians with full practices who are unable to cope 
with a sudden and seasonal influx of additional pa¬ 
tients. In addition, migrants’ cultures are usually 
vastly different from that of overburdened local pro¬ 
viders, and they have special needs for support and 
facilitating services. Because of the instability of their 
living arrangements they are unlikely to have their 
health care needs met in time to prevent more serious 
illnesses. 29 


Individuals With HIV Infections 

According to CDC estimates, there are one and a 
half million persons infected with the HIV virus, with 
an estimated 285,000 cases of AIDS expected by 1992. 
GAO believes these estimates are low—that there will 
be 365,000 cases by the end of 1992. 30 This popula¬ 
tion has enormous needs that are straining the health 
care system. Primary care is an increasingly important 
component of caring for HIV infected persons and 
community-based resources are critical—particularly 
as the disease spreads to more inner city substance 
abusers, their sexual partners, and children. HIV in¬ 
fection poses substantial problems for the health care 
system because those infected are often times poor, in 
general bad health, homeless, and IV drug abusers. 
An additional problem is that providers for HIV posi¬ 
tive patients may be limited. Doctors and nurses alike 
have begun to report increasing psychological and 
emotional strain from working with AIDS patients. 
Fear of becoming infected causes the health care pro¬ 
viders to question their ethical obligation to treat HIV 
infected patients. 31 


29 The Bureau of Health Care Delivery and Assistance, “The Bureau’s 
Unique Role,” 11-12. 

30 Centers of Disease Control, Department of Health and Human Services, 
Public Health Reports, 103, supp. 1 (Washington, D.C.: 1988), 3. 

31 Institute of Medicine, National Academy of Sciences, Confronting AIDS 
Update 1988 (Washington, D.C.: National Academy Press, 1988), 12. 


Substance Abusers 

Substance abuse is a major national problem which 
has social, economic and health consequences. There 
are 6.5 million abusers of illicit drugs in this coun¬ 
try. 32 Substance abuse treatment facilities and services 
are insufficient to meet the need, especially for the 
poor. In addition they are seldom integrated with pri¬ 
mary care and other physical health services. For ex¬ 
ample, alcoholics are frequently malnourished and 
need nutritional therapy and counseling but may not 
receive them. Primary care service programs are 
needed to identify substance abusers, ensure their 
treatment by appropriate providers, and support them 
with comprehensive primary care, including preven¬ 
tive medical and counseling services. 33 

Substance abusers frequently overlap with other 
high risk groups. For example, drug abusers are at 
significantly increased risk of HIV infection, sub¬ 
stance abuse is a major problem among the homeless 
and there is a growing problem of substance abuse 
among pregnant women. It is estimated that approxi¬ 
mately 375,000 children were born exposed to drugs 
in 1988. 34 Many of these infants are “boarder babies,” 
who are ready to be released by the hospital but have 
been abandoned by their parents. Most boarder babies 
are drug exposed, and their mothers are addicts. 35 


The Homeless 

Estimates of the number of homeless individuals 
vary. According to U.S. Health and Human Services 
documents, there are between 550,000 and 600,000 
homeless people in the United States on any given 
night. An estimated 1.3 million to 2 million persons 
are homeless on one or more nights in the course of 
the year. Families, mostly women with children, make 
up 23% of the homeless population. Minorities are 
disproportionately represented, at 2 to 4 times their 
proportion of the general population. The homeless 
have complex health needs, ranging from trauma 
treatment to foot care, and have difficulty integrating 
into a health system designed for the housed. They 
are afflicted by numerous cultural, environmental, and 
economic barriers that inhibit the maintenance of 


32 Office of the Assistant Secretary for Planning and Evaluation, Depart¬ 
ment of Health and Human Services, “Abusers of Illicit Drugs,” an Attach¬ 
ment to a July 6, 1989 Memorandum from Jerry Britten entitled “Paper for 
July 12, 1989 Meeting on Access to Health Care” (Typewritten). 

33 The Bureau of Health Care Delivery and Assistance, “The Bureau’s 
Unique Role,” 13. 

34 Laura Feig, Office of the Assistant Secretary for Planning and Evalua¬ 
tion, Department of Health and Human Services, “Drug Exposed Infants and 
Children: Service Needs and Policy Questions,” (Washington, D.C.: January 
29, 1990), 2. 

35 Feig, “Drug Exposed Infants,” 6. 


110 




good health. They are typically uneducated and/or 
virtually dysfunctional, limiting employment possibili¬ 
ties. They have no insurance or very limited insur¬ 
ance. One-third of the homeless suffer from severe 
mental illness. Living conditions are hazardous, at 
best, and expose the homeless to additional risks of 
disease. Malnutrition rates are high, and immunization 
rates among children in homeless families are low. 
The result is that group shelters for the homeless pose 
significant public health hazards, as they are reser¬ 
voirs for communicable disease (e.g., respiratory in¬ 
fections, TB, chicken pox). Finally, a high percentage 
of the homeless belong to other high-risk population 
groups—that is, they have AIDS, and/or alcohol and 
drug dependencies. Thirty-five to forty percent of the 
homeless have alcohol problems and between 10 and 
20 percent abuse other drugs. 36 


Elderly 

The number of older Americans is growing. Only 4 
percent of the population in 1900 was elderly, where¬ 
as by the year 2000, 13 percent of the population will 
be age 65 or older. 37, 38 The elderly require multiple 
health and social services. First, their health care 
problems can be both physical and mental. In addition 
to multiple chronic physical problems which are cu¬ 
mulative with age, a substantial portion of the elderly 
(18 percent) have significant psychiatric symptoms of 
acute or chronic mental illness, retardation or depres¬ 
sion. 39 Many elderly, particularly the 5.7 million poor 
elderly, also require social/support services to address 
problems such as isolation and inadequate transporta¬ 
tion to reach providers. 40 


CURRENT EFFORTS—EXISTING 
COMPREHENSIVE PRIMARY 
CARE PROGRAMS 

There are several types of subsidized service deliv¬ 
ery programs that serve the estimated 26 million per¬ 
sons lacking a regular private sector primary care 
physician. 41 These include hospital outpatient depart - 

38 Office of the Assistant Secretary for Planning and Evaluation, Depart¬ 
ment of Health and Human Services, “The Homeless,” an Attachment to a 
July 6, 1989 Memorandum from Jerry Britten entitled "Paper for July 12, 
1989 Meeting on Access to Health Care” (Typewritten). 

37 Office of Disease Prevention and Health Promotion, The Facts, 181. 

38 The Bureau of Health Care Delivery and Assistance, “The Bureau’s 
Unique Role,” 13. 

3 ® National Institute on Aging, Personnel for the Health Needs of the Elderly 
Through the Year 2020 (Report to Congress, 1987). 

40 The Bureau of Health Care Delivery and Assistance, “The Bureau’s 
Unique Role,” 13. 

41 Aiken, Lewis, Craig, Mendenhall, Blendon, and Rogers, The Contnbu- 
tion of Specialists,” 1363-1370. 


ments, State and local health departments, school- 
based programs, and Federally funded and privately 
supported health centers. These programs, financed 
through a variety of mechanisms, are designed to ef¬ 
fectively address the barriers already described. They 
do so by (1) ensuring the presence of providers and 
facilities, (2) offering comprehensive primary medical 
care, (3) providing outreach and case management, 
and (4) including community input. 

In 1987, for those Americans with family incomes 
of less than $10,000, 43.8 percent of their physician 
contacts were in a doctor’s office, 19.2 percent were 
with a hospital outpatient department, and 20.3 per¬ 
cent were with clinics. This contrasts with those 
families with incomes greater than $35,000, in which 
62.3 percent of physician contacts were in a doctor’s 
office, while only 11.2 percent were in a hospi¬ 
tal outpatient department, and 11.1 percent were in 
clinics. 42 For those with Medicaid, the likelihood of 
receiving services from a private physician is higher. 
However, Medicaid recipients depend heavily on sub¬ 
sidized primary care programs as well since there is a 
shortage in many areas of primary care providers 
who treat Medicaid patients. For example, in Phila¬ 
delphia, 23.5 percent of Medicaid recipients cite a 
hospital as their usual source of care. 43 

Programs of the Federal Bureau of Health 
Care Delivery and Assistance 

The Bureau of Health Care Delivery and Assist¬ 
ance (BHCDA), within the Health Resources and 
Services Administration of the U.S. Public Health 
Service, is responsible for a group of community- 
based programs providing primary care and case 
management to approximately six million poor and 
underserved persons through grants and manpower 
recruitment. The BHCDA programs, which together 
encompass 610 grantees at more than 1,500 sites, 
include 550 community and migrant health center 
(C/MHC) grantees comprising the basic delivery 
system; services to special populations (women of 
child bearing age and their infants, the homeless, sub¬ 
stance abusers and persons with AIDS); and National 
Health Service Corps activities (recruitment, loan re¬ 
payment and scholarships, and placement). 

Community and Migrant Health Centers—In 1989 
C/MHCs served 5.5 million Americans and had total 


42 National Center for Health Statistics, Department of Health and Human 
Services, Health, United States. 1988 (Washington, D.C.: Government Print¬ 
ing Office, March 1989), 106. 

43 The Bureau of Health Care Delivery and Assistance, “The Bureau’s 
Unique Role,” 10. 


Ill 




revenues of $1.12 billion, of which 45 percent came 
from Federal grants. The remainder came from pa¬ 
tient payments on a sliding fee scale and insurance 
collections (42 percent) and State, local and other 
support (13 percent). 

The Comprehensive Perinatal Care Initiative—This 
program provided $20 million in each of FYs 1988 
and 1989 to over 200 C/MHCs for the purpose of en¬ 
hancing outreach and case management activities 
during pregnancy and the first year of life. These 
services have reached approximately 100,000 
mother/infant pairs. 

The Health Care for the Homeless Program— 

Through this program $60 million in FY 1988 and 
1989 was awarded to 109 community-based organiza¬ 
tions who offered primary care services to homeless 
populations. Roughly 231,000 homeless people were 
served in 1988, the first year of operation, with ap¬ 
proximately 400,000 persons being served in 1989. 

Substance Abuse—In FY 1988 BHCDA awarded 
$3.8 million to 43 projects to combine primary care 
with special services for substance abusers. In FY 

1989 $9 million was provided in a collaborative effort 
with the National Institute of Drug Abuse to 21 
community-based organizations, to integrate primary 
care services with substance abuse treatment. Under 
this program approximately 21,000 persons were seen 
for both substance abuse and primary care services. 

AIDS—In FY 1989, under an inter-agency agree¬ 
ment between the Centers for Disease Control and 
BHCDA, three CHCs were funded to participate in 
an AIDS prevention and treatment program. In FY 

1990 more than $10 million will be available to 
expand the AIDS treatment and prevention pro¬ 
gram to as many as 20 centers located in high risk 
communities. 

The National Health Service Corps—NHSC helps 
recruit and retain physicians and other health profes¬ 
sionals in areas with shortages of these providers. It 
previously relied on a scholarship program which ob¬ 
ligated recipients to serve in a shortage area. The 
scholarships were dramatically reduced, beginning in 
1981. The NHSC now operates a small scholarship 
program, a program to recruit providers who serve in 
return for payment of their educational loans, and 
demonstration grants to develop state loan repayment 
programs. It also aids C/MHCs and freestanding sites 
in retaining existing providers and recruiting pri¬ 
vately. FY 1989 funding for the NHSC was approxi¬ 
mately $49 million. There were approximately 2,400 
physicians providing primary care, mostly although 


not exclusively in C/MHCs. Forty-two new scholar¬ 
ships were awarded in FY 1989. 


Federal Block Grant Programs 

There are two Federal Block Grant programs that 
help support primary care services to underserved 
populations—the Maternal and Child Health Services 
(MCH) Block Grant, and the Preventive Health and 
Health Services (PHHS) Block Grant. Under these 
Block Grant programs, Federal dollars are channeled 
to State Health Departments, with approximately 25 
to 30 percent being allocated by the States to local 
health departments. In FY 1989 $465.3 million was 
allotted under the MCH Block Grant and $84.3 mil¬ 
lion was awarded under the PHHS Block Grant. 44, 45 
Ways in which State and local health departments use 
these monies to address barriers to accessible care are 
described later in this paper. 


Programs of the Indian Health Service 

The Indian Health Service (IHS) is the principal 
Federal health resource for the one million American 
Indians and Alaska natives living on or near Federal 
reservations or in traditional Indian Territory. The 
IHS provides primary care services through the oper¬ 
ation of 66 health centers, 5 school health centers, and 
approximately 100 smaller health stations and satellite 
clinics. Additional clinics are managed by tribes 
through contracts with the IHS. They operate 73 
health centers, 2 school health centers, and approxi¬ 
mately 250 smaller health stations and satellite clinics. 
The IHS also contracts with Indian Health Organiza¬ 
tions in 33 urban reservations with an estimated 
Indian population of 380,000. These projects provide 
services ranging from outreach and referral to direct 
provision of primary care. In FY 1988, over 1 million 
people received primary care services through these 
combined programs of the Indian Health Service. 46 


State and Local Health Departments 

Each State has an established Health Department 
vested with the primary responsibility for public 
health. There are nearly 3,000 local health depart- 

44 Budget Appropriations Act, 1989. 

45 Conference Report on the Department of Labor, Health and Human 
Services, Education, and Related Agencies, Appropriated Bill 1990, (101- 
354). Centers for Disease Control, Preventive Health Services Block Grant 
(Washington, D.C.), 27. 

48 Indian Health Service, Public Health Service, Department of Health 
and Human Services, “Justifications of Budget Estimates to OMB” (Vol. Ill), 
1, 56, 73. 


112 



ments providing direct community health services. In 
States with no local health departments the State 
Health Department is usually the primary provider of 
these community services. 

States use their own resources plus Federal monies 
from the MCH and Preventive Services Block Grants 
to provide a variety of health services. In order to re¬ 
ceive their MCH block grant allocation, States are re¬ 
quired to match each $4 of Federal funds received 
with $3 of their own funds. 47 There is no matching 
requirement for the PHHS Block grant. 

Many State and local health department efforts 
have in the past and continue to be characterized by 
traditional public health activities—discrete single 
health services (e.g., immunizations), usually provided 
in clinics or dispensaries. Increasingly, though, health 
departments are broadening their mission to provide 
comprehensive primary care services. The National 
Association of County Health Organizations estimates 
that approximately 25 percent of local health depart¬ 
ments provide organized primary care services. The 
Association is working to get estimates of the number 
of persons served by these programs. 


The Private Sector 

Philanthropic foundations and others have pio¬ 
neered new approaches to building capacity and 
reaching high risk groups. Also, there are currently 
over 500 private, non-Federally funded health centers 
throughout the country that provide comprehensive 
primary care services. 48 However, support for on¬ 
going care of the indigent is increasingly unstable, and 
the cross-subsidies of the poor by the well-off are rap¬ 
idly becoming a thing of the past. Data could not be 
obtained on the number of individuals who receive 
primary care services through private clinics and 
other philanthropic programs. 

Public and Non-Profit 
Community Hospitals 

Hospitals are by necessity the only family doctor in 
many urban and rural areas. Oftentimes, because pri¬ 
vate physicians are unavailable in their areas, inner 
city dwellers (particularly the poor and minorities) 
rely on hospital emergency rooms or outpatient de¬ 
partments as their principal source of primary care. 

47 Edward R. Klebe, Congressional Research Service, The Library of 
Congress, “Health Services Programs for Populations in Need,” (August 17, 
1989), 2. 

48 National Association of Community Health Centers (unpublished data, 
Washington, D.C.: October 27, 1989). 


As noted earlier, the poor are more likely than the 
nonpoor to see physicians in a hospital outpatient de¬ 
partment or emergency room (19 percent of the poor 
vs. 11.2 percent of the non-poor). 49 Also, the unin¬ 
sured are more likely than any other group to use 
hospitals for primary care. The American Hospital 
Association (AHA) estimates that approximately 4.9 
million uninsured persons rely on hospitals for such 
care. 50 In 1987, 4,242 hospitals, or 68 percent of the 
6,281 hospitals responding to the AHA survey, pro¬ 
vided non-emergent primary care services through an 
organized outpatient department. 51 

The hospitals that serve many of these patients are 
facing severe financial strains, jeopardizing their ca¬ 
pacity to provide care. Services in hospital clinics are 
frequently episodic and disease oriented, with little 
continuity or coordination among the various spe¬ 
cialty clinics, let alone with outside agencies. 52 This 
makes care costly and reduces effectiveness. Addi¬ 
tional reasons that primary care delivered in hospital 
outpatient departments is more expensive than care 
delivered in a free-standing setting include: (1) lack of 
control by outpatient department directors over their 
own costs; (2) the degree to which the availability of 
sophisticated and expensive technology within the 
hospital setting encourages its utilization; and (3) the 
fact that “sicker” patients tend to be seen in out¬ 
patient departments. 53 

Responding to these growing financial strains, as 
well as to the increasing numbers of people who are 
relying on hospitals for primary care, an unknown 
number of both public and not-for-profit hospitals 
have reorganized their outpatient departments and 
neighborhood clinics in recent years to provide com¬ 
prehensive primary care, as opposed to episodic care, 
in a variety of specialty clinics or emergency rooms. 


School Based Programs 

The Center for Population Options reports that 
there are 150 school-based health centers operating in 
middle or junior high schools and senior high schools 
in most cities as well as in many rural areas. The 
number is somewhat higher if centers located adjacent 
to school property are included. This group is work- 


49 National Center for Health Statistics, Health, United States, 1988, 106. 

50 Irene Frazer, American Hospital Association, Data submitted by memo¬ 
randum to Department of Health and Human Services (Chicago, Ill.: March 
23, 1990). 

51 Frazer, memorandum. 

52 Diana B. Dutton, Ph.D., “Children’s Health Care: The Myth of Equal 
Access,” in Better Health for Our Children, The Report of the Select Panel for 
the Promotion of Child Health, Vol. IV (1981), 382. 

53 Marsha Gold, “Hospital-Based versus Free-Standing Primary Care 
Cost,” The Journal of Ambulatory Management, 2 (1) (February 1979). 


113 




ing to get estimates of the number of young persons 
served. Clinics are located in 32 states and 91 commu¬ 
nities. The number of clinics have increased five-fold 
since 1983. These clinics serve low-income, predomi¬ 
nately minority youth who have limited access to 
other sources of health care. One-third of all school 
based clinic users have no health insurance. For about 
a half of all enrolled students, school-based health 
clinics are their sole or primary source of health care. 
A wide range of medical and counseling services are 
provided, including primary health care and preven¬ 
tive services. 54 

School based health centers are funded by a variety 
of public and private sources. In 1989 approximately 
two-thirds of the funding came from public sources, 
including States, cities, counties, Block Grants, Med¬ 
icaid, the EPSDT program, and school districts. A 
number of school based health programs are part of a 
Federally funded health center. Foundations are virtu¬ 
ally the only source of private funding for school- 
based health clinics. In 1989, foundations provided 31 
percent of total funding, down from 41 percent the 
previous year. Insurance payments and patient fees 
each year accounted for less than one percent of 
clinic funding. 55 


THE EFFECTIVENESS AND IMPACT 
OF EXISTING PROGRAMS 

There is strong evidence that the existing compre¬ 
hensive primary care programs described above have 
made significant inroads in reducing barriers to the re¬ 
ceipt of appropriate health care. More evidence exists 
about federally funded primary care centers than 
about other programs. However, if characteristics of 
the other programs are similar, it should be possible 
to assume that they would share the attributes of fed¬ 
erally funded centers. 56 The evidence described 
below is presented both in terms of specific ways in 
which each barrier is being reduced, and improve¬ 
ments in health status/outcome measures. 


Reducing Financial Barriers 

Subsidized primary care service delivery programs 
play a significant role in serving the nation’s poor. 


54 Claire Brindis, Dr. P.H., “A Synthesis of Recent Evaluation Findings 
On School-Based Health Centers,” presented as part of a National Health 
Policy Forum Workshop (Washington D.C.: November 28, 1989), 1-2. 

55 Brindis, “School-Based Health Centers,” 2. 

56 Bonnie Lefkowitz and Dennis Andrulis, “The Organization of Primary 
Health and Health Related Preventive, Psychosocial, and Support Services 
for Children and Pregnant Women,” in Better Health for Our Children, The 
Report of the Select Panel for the Promotion of Child Health, Vol. IV (1981), 
456. 


Approximately 60 percent of those served by Feder¬ 
ally funded C/MHCs have incomes under the poverty 
level, and another 25 percent are between 100 and 
200 percent of poverty. 57 Similarly, 50 percent of 
those served through hospital outpatient and health 
departments are poor. 58 These programs, by targeting 
to underserved groups, care for the uninsured and 
make Medicaid a reality for many people who, al¬ 
though Medicaid-eligible, lack access to a provider. 


Reducing Capacity/Resource Barriers 

C/MHCs are required to be in the underserved 
urban and rural areas in the United States with the 
most substantial shortfalls of primary care providers. 
In addition, evidence suggests that both urban and 
rural centers have increased the utilization of health 
services. 59, 60, 61 Similarly, hospital outpatient de¬ 
partments and local health departments lower access 
barriers by their locations in underserved areas. 

The NHSC scholarship and loan repayment pro¬ 
grams attract physicians to underserved communities. 
Priority of selection of scholarship and loan repay¬ 
ment recipients goes to individuals with backgrounds 
and interests compatible to practice in underserved 
areas, and to individuals enrolled in institutions that 
have a history of producing large numbers of primary 
care physicians and who have an emphasis on care to 
underserved populations. C/MHCs affiliate with hos¬ 
pital residency programs, especially in family medi¬ 
cine and other primary care specialties, in order to 
receive direct services from residents, recruit them 
as future staff members, and improve the retention of 
C/MHC physicians who value the hospital affiliation 
and its teaching opportunities. Notable examples are 
found in Seattle, Washington and Bronx, New York. 

Federal primary care programs also help build sys¬ 
tems of care in underserved areas by collaborating 
with State and local health departments through State 
Cooperative Agreements and Primary Care Associa¬ 
tions and local coalitions. The goal of these collabora¬ 
tive efforts is to ensure the availability of primary 


57 The Bureau of Health Care Delivery and Assistance, “The Bureau’s 
Unique Role,” 16. 

58 M.G. Kovar, "Background Paper for the Select Panel for the Promo¬ 
tion of Child Health,” (unpublished data from the National Health Interview 
Survey for 1974, Washington, D.C.: 1980). 

59 R.A. Reynolds, “Improving Access to Health Care Among the Poor— 
The Neighborhood Health Center Experience,” Milbank Memorial Fund 
Quarterly: Health and Society 54 (Winter 1976): 47-82. 

80 H. Snyder, et al., “The Effect of Provision of Medical Facilities on Use 
by the Migrant Workers in California,” Medical Care 6 (September-October, 
1968): 394-400. 

61 G. Sparer and L.M. Okada, “Chronic Conditions and Physician Use 
Patterns in Ten Urban Poverty Areas,” Medical Care 12 (July 1974): 549-560. 


114 




care services and case management, while avoiding 
duplication. 


Reducing Organizational/Operational 
Barriers 

A number of service delivery programs, in conjunc¬ 
tion with State and local health departments, are 
working to coordinate services and resources avail¬ 
able from multiple and varied programs, thus enhanc¬ 
ing the accessibility of service delivery. This includes 
case management of the medical continuum, as well 
as of a broad range of welfare and other support serv¬ 
ices. The Office of Maternal and Child Health is cur¬ 
rently funding demonstration projects to implement 
one-stop shopping programs at C/MHCs and other 
sites. This involves co-location of health, social, and 
welfare services from different agencies in the same 
physical location. C/MHCs have historically jointly 
addressed the social and clinical aspects of health 
care. Currently, 113 C/MHCs receive WIC funding, 
and many more provide WIC services directly or by 
arrangement. Three to four demonstration projects of 
new one-stop shopping approaches are planned for 
FY 1990. Finally, 35 State and Regional Primary 
Care Associations and 33 State Primary Care Cooper¬ 
ative Agreements are working with their respective 
States on presumptive and on-site Medicaid eligibil¬ 
ity. C/MHCs in at least 20 States are eligibility deter¬ 
mination sites. 

These efforts to coordinate various programs help 
to avoid duplication, and increase the likelihood that 
individuals will access all that is available to them. 
Such integration is critical to a disadvantaged popula¬ 
tion faced with a patchwork of programs at different 
sites and with oftentimes inconsistent requirements. 


Reducing Cultural/Social Barriers 

Subsidized service delivery programs have effec¬ 
tively focused their efforts on minority groups. Ap¬ 
proximately 64 percent of those served by CHCs are 
members of minority groups, and those served by 
MHCs are 50 percent Hispanic and 35 percent 
black. 62 ’ 63 Similarly, over 50 percent of those served 
by hospital outpatient and health departments are mi¬ 
norities. 64 Finally, there is considerable support for 


62 The Bureau of Health Care Delivery and Assistance, “The Bureau’s 
Unique Role,” 16. 

63 The Bureau of Health Care Delivery and Assistance, "The Bureau's 
Unique Role,” 16. 

64 Kovar, “Background Paper for the Select Panel for the Promotion of 
Child Health.” 


education of minority health professionals, since these 
professionals often serve minority, underserved popu¬ 
lations. The NHSC recruitment program has devel¬ 
oped a recruitment plan to increase the number of 
Hispanic officers by 150 within 2 years. Additionally, 
the National Medical Association, under a contract 
with the Health Services and Resources Administra¬ 
tion, actively promotes education for minority health 
professionals by visiting and providing informational 
materials to minority students in colleges. 

In addition to the delivery of medical care, primary 
care programs can offer a wide range of outreach 
services which facilitate the receipt of care which is 
available. C/MHCs are governed by consumer-based 
Boards of Directors. These volunteers, who represent 
a broad spectrum of community concerns, encourage 
outreach activities which will help to ensure cultur¬ 
ally sensitive and appropriate care. Examples of inno¬ 
vative approaches of C/MHCs to outreach are a 
“mom-mobile” for Indianapolis centers and use of ath¬ 
lete celebrities to reach school aged youth in Detroit. 

The effectiveness of culturally sensitive outreach 
services is illustrated by a 1974 study which com¬ 
pared pregnant women who used health centers with 
outreach services, traditional hospital outpatient de¬ 
partments, and Medicaid physicians, and found that 
the women who used health centers were most likely 
to be satisfied with their obstetric and pediatric care 
and most likely to make postnatal visits. 65 More re¬ 
cently, several CHCs in Pennsylvania which sponsor 
lay home visiting programs have shown that since im¬ 
plementation of home visiting services, the rates of 
prenatal visit compliance, the return rate for post¬ 
partum care, returns for routine pediatric care, attend¬ 
ance at prenatal and parenting classes, compliance 
with family planning appointments and WIC registra¬ 
tion have all improved. 66 

In addition to outreach activities, primary care pro¬ 
grams can provide a wide range of social services 
which address language, educational, environmental, 
and other cultural barriers. An example is the 
“Women’s Residential Program,” offered by the Eco¬ 
nomic Opportunity Family Health Center in Miami, 
Florida. This program, which was developed to re¬ 
spond to the problem of substance abuse among 
women of child-bearing age, provides detoxification 
and preventive health services (i.e., individual and 
group therapy) as well as GED preparation, job train¬ 
ing and placement, parenting education and coun- 


65 J. Birch, and S. Wolfe, “New and Traditional Sources of Care Evalu¬ 
ated by Recently Pregnant Women,” Public Health Reports 91 (September- 
October, 1976): 412-422. 

66 Marcella E. Lingham, Ed.D., Letter to Natalie Levkovich, Quality 
Community Health Care, Inc. (Philadelphia, Pa.: November 13, 1989). 


115 




seling, long-term follow-up, and child care on the 
premises. As another example, Beaufort-Jasper 
Comprehensive Health Services, in South Carolina, 
provides a broad range of medical as well as social 
support services in a community with a very high 
infant mortality rate, and predominantly poor resi¬ 
dents. A high proportion of the population lives in 
substandard housing. In addition to health care, the 
center provides environmental services. One very tan¬ 
gible result, which has an obvious impact on health 
status, is the fact that the center has installed or up¬ 
dated well over 100 water systems for families who 
previously had poor water systems supplies. 67 


Clinical Outcomes/Health Status 

A number of studies have shown that, in their 
impact on the underserved families they were in¬ 
tended to serve, primary care programs have been 
quite successful. Many of these studies included con¬ 
trol groups who used Medicaid but not a service de¬ 
livery program. Unfortunately, most of the research 
noted below was conducted in the 1970s and early 
1980s. There has been little analysis on the effective¬ 
ness of primary care models in the last ten years. 

Efficiency and Cost-Effectiveness —CHC patients 
have lower hospital admission rates, shorter lengths of 
stay, and make less inappropriate use of emergency 
rooms than similar patients not using CHCs. 68, 69 For 
example, an extensive study in five cities found hospi¬ 
tal days were reduced by 25 percent for child and 
adult users of CHCs compared with all similar 
nonusers in control groups and 22 percent for users 
compared with those in control groups using a private 
physician. 70 Similar results have been found by 
others. The effect of primary care service delivery 
programs was demonstrated in a three-city study 
which found that Medicaid recipients who were users 
of community health centers had total annual Medi¬ 
caid costs of 6-58 percent less than a control group 
of Medicaid recipients who relied on hospitals and 
private physicians for their usual source of care. 71 
Additionally, emergency room visits by children were 
reduced 38 percent by primary care centers in 


87 Lefkowitz and Andrulis, “The Organization of Primary Health Serv¬ 
ices,” Better Health for Our Children, 475. 

68 Schorr, Within Our Reach, 132. 

69 Andrea McCrensky-Kremer and Richard Kremer, “Overview of DRGs: 
What they are and How They Work,” (draft unpublished report, Harrisburg, 
Pa.: September 27, 1989), 13-15. 

70 L.M. Okada and T. Wan, “Patterns of Health Services Utilization in 
Urban Low Income Areas.” Paper presented to the Institute of Management 
Science/Operations Research Society of America, Joint National Meeting, 
New Orleans, La.: April 30-May 2, 1979. 

71 The Bureau of Health Care Delivery and Assistance, “The Bureau’s 
Unique Role,” 21. 


Rochester. 72 Where hospital outpatient departments 
resemble comprehensive primary care centers in serv¬ 
ices and organization, similar findings have been 
noted. For example, one study shows that users of a 
hospital-based health center in Boston had signifi¬ 
cantly lower use of emergency rooms than 
nonusers. 73 

Infant Mortality —Health centers have a beneficial 
and statistically significant effect on both white and 
black infant mortality rates. In a nationwide analysis, 
counties served by health centers have been found to 
have white infant mortality rates that are 1.5/1,000 
lower, and black infant mortality rates that were 
2.9/1,000 lower, than those in surrounding counties. 
Counties with four or more health centers were found 
to have infant mortality rates as much as 10 percent 
lower than counties with no health centers. 74 

The provision of comprehensive primary care serv¬ 
ices by health departments has also been associated 
with improvements in the area of low birth weight 
and infant mortality. 75 For example, between 1970 
and 1978, the Cincinnati Health Department reduced 
infant mortality by eight percent. Also, during pro¬ 
vision of primary care services between 1970 and 
1977, Maricopa County (Arizona) had its low birth 
weight rate reduced by 16 percent, and Pickens 
County (South Carolina) had its nonwhite infant mor¬ 
tality rate reduced by 38 percent, from 40.7 to 25.3, 
between 1970 and 1973. Finally, Denver’s Neighbor¬ 
hood Health Program (a joint CHC/health depart¬ 
ment effort) resulted in a 2 5-percent reduction in 
infant mortality. 76 

Childhood Diseases —Primary care programs have 
reduced rheumatic fever and untreated middle ear in¬ 
fections, and have brought about an increase in the 
number of immunized children. For example, one 
study attributes a 60 percent decrease in rheumatic 
fever in Baltimore areas served by primary care cen¬ 
ters to early detection and treatment of streptococcal 
infections. 77, 78 


72 L.E. Hochheiser, “Effect of the Neighborhood Health Center on the 
Use of Pediatric Emergency Departments in Rochester, New York,” New 
England Journal of Medicine 285 (1971): 148-152. 

73 E.J. Sussman, “Can Primary Care Deliver?” Journal of Ambulatory Care 
Management 2 (August 1979): 23-29. 

74 Michael Grossman, Ph.D., and Fred Goldman, Ph.D., “An Economic 
Analysis of Community Health Centers,” National Bureau of Economic Re¬ 
search (January 1983). 

75 Lefkowitz and Andrulis, “The Organization of Primary Health Serv¬ 
ices,” Better Health for Our Children, 460. 

76 A. Chabot, “Improved Infant Mortality Rates in a Population Served by 
a Comprehensive Neighborhood Health Program,” Pediatrics 47 (June 1971): 
989-994. 

77 Schorr, Within Our Reach, 132. 

78 L. Gordis, “Effectiveness of Comprehensive Care Programs in Prevent¬ 
ing Rheumatic Fever,” New England Journal of Medicine 290(8) (August 16, 
1973): 330-336. 


116 




Clinical Management—Studies of clinical manage¬ 
ment and quality of care, measured by recordkeeping, 
indicate that Federal primary care programs are at 
least equal and sometimes superior to other estab¬ 
lished providers, including private physicians, and 
that health department primary care programs are su¬ 
perior to private physicians and outpatient depart¬ 
ments. 79, 80, 81 Many Federal primary care centers 
pioneered the team approach as well and have found 
it effective. 82, 83, 84 

Social Services—Social support services offered 
through primary care programs are critical in protect¬ 
ing an individual’s health. For example, programs to 
counteract certain environmental hazards through or¬ 
ganized health settings have been effective in reduc¬ 
ing morbidity and mortality. 85, 86 


FUTURE DIRECTIONS 

Although the successes to date are encouraging, 
more remains to be done. A range of activities is 
needed to reduce barriers to care, and ultimately im¬ 
prove health status. These activities, for the most part, 
are not new. They are currently being implemented at 
innovative organized primary care delivery sites. 
However, implementation is far from universal. A 
model for reform, which describes an optimal con¬ 
tinuum of activities, is described below. Additionally, 
the interaction between financing and delivery system 
reform is discussed. Finally, strategies for continued 
targeted direct support of organized primary care de¬ 
livery programs are presented. 


79 M.A. Morehead, R.S. Donaldson, and Ml Servalli, “Comparisons Be¬ 
tween OEO Neighborhood Health Centers and Other Health Care Providers 
of Ratings of the Quality of Health Care,” American Journal of Public Health 
61(7) (July 1971): 1294-1306. 

80 M.A. Morehead and R.S. Donaldson, “Quality of Clinical Management 
of Disease in Comprehensive Neighborhood Health Centers,” Medical Care 
12 (1974), 301-315. 

81 M.A. Morehead, Final Report 1968-1976 of Review of Federally Sup¬ 
ported Neighborhood Health Centers, Contract Number 105-74-170 (Albert 
Einstein College of Medicine, Bronx, N.Y.: 1977). 

82 Morehead, “Review of Federally Supported Neighborhood 
Health Centers.” 

88 M.H. Becker, R.H. Drachtnan, and J.P. Kirscht, “A Field Experiment 
to Evaluate Various Outcomes of Continuity of Medical Care, American 
Journal of Public Health, 64 (November 1974): 1062-1070. 

84 K. Davis and R. Marshall, “Personal Health Care Services for Medi¬ 
cally Underserved Populations,” Papers on the National Health Planning 
Guidelines, Health Resources and Services Administration, Department of 
Health and Human Services (Washington, D.C.: 1977). 

85 C. Spiegel and F. Lindaman, “Children Can’t Fly: A Program to Pre¬ 
vent Pregnant Childhood Morbidity and Mortality From Window Falls,” 
American Journal of Public Health 67 (1977): 1143-1146. 

88 P. Peacock, A. Gelman, and T. Lutins, "Preventive Health Care 
Strategies for Health Maintenance Organization, Preventive Medicine 4 
(1975): 183-225. 


Model for Addressing Barriers 

For optimum effectiveness, a model service de¬ 
livery program would include the components 
described below. 

Medical Primary Care—Comprehensive medical 
primary care should be offered in an environment that 
is physically accessible to the population it is intended 
to serve, and that has a sufficient number of appropri¬ 
ately trained professionals who are sensitive to cul¬ 
tural, ethnic, and language differences. 

For many services, the manner of delivery is as 
important as the fact of delivery. For this reason, in 
addition to increasing the numbers of health care pro¬ 
viders, organized primary care programs should in¬ 
crease efforts to recruit and/or train professionals that 
are perceived by those they serve as people who care 
about them and respect them. Schorr states in Within 
Our Reach that “staff must be able to respond to the 
individual needs of those they serve. The nature of 
their services, the terms on which they are offered, 
the relationships with families, the essence of the pro¬ 
grams themselves—all take their shape from the needs 
of those they serve, rather than from the pre¬ 
cepts, demands, and boundaries set by professionalism 
and bureaucracies.” 87 

Case Management and Coordination of Services— 

Case management activities should include proper and 
timely referrals to medical specialists, as well as to 
programs for mental health and substance abuse serv¬ 
ices. Additionally, there should be case management, 
and where possible, co-location of a broad range of 
welfare and other support services, including income 
support, housing, and job training. Successful pro¬ 
grams are those that provide services that are coher¬ 
ent and easy to use. Relying too heavily on referrals 
to other agencies interferes with getting needed serv¬ 
ices. 88 Thus efforts to integrate services should in 
particular encourage co-location of related services 
and development of common eligibility requirements, 
rather than simply an active referral network. The 
importance of integrating a wide range of available 
services has been noted by David Rogers, former 
President of the Robert Wood Johnson Foundation. 
He states that service programs cannot respond to 
intertwined and interconnected needs without 
regularly “crossing traditional professional and bu¬ 
reaucratic boundaries.” 89 Other support services are 
necessary to encourage at risk populations to maintain 
participation in care, and arrange for additional care 


87 Schorr, Within Our Reach 259, 269, 278. 

88 Schorr, Within Our Reach 258. 

89 Schorr, Within Our Reach 257. 


117 




as needed. Examples of such services which organized 
primary care programs should work to enhance in¬ 
clude on-site day care, health education programs, bi¬ 
lingual services, and environmental services. 

Community Outreach—In order for needy popula¬ 
tions to best benefit from the facilities, services, and 
coordinating systems which may be in place, it is crit¬ 
ical that there be a strong outreach program which 
fosters health prevention and promotion behavior, en¬ 
courages early entry into the health and social serv¬ 
ices systems, and includes rigorous and continuous 
follow-up activities. These outreach activities are 
more effective if they are linked to a service delivery 
program, rather than existing independently. The so¬ 
lution lies in helping communities implement their 
own change in health behaviors, so that available 
services and resources will be used more often, and 
more effectively. Ways for primary care service de¬ 
livery programs to increase their outreach efforts 
include use of volunteer outreach workers, public in¬ 
formation campaigns directed at high-risk groups, 
telephone hotline services, transportation and home 
visiting programs, and periodic review of office or 
clinic procedures to make certain that access is easy 
and prompt, bureaucratic requirements minimal, and 
the atmosphere welcoming. 90 

Community Input and Responsiveness—Primary care 
programs should address unique local circumstances 
and health care problems, and should be flexible 
enough to meet the diverse needs of the underserved. 

Evaluation—There has been a recent dearth of 
studies on the effectiveness of primary care models 
and services. Part of any model should be the capabil¬ 
ity to study reforms and provide short term feedback 
and longer term evaluation of impact. 

The Interaction Between Financing and 
Delivery System Reform 

Expanding health care insurance coverage should 
reinforce—not replace—support for primary care de¬ 
livery systems. Specifically, insurers should not be al¬ 
lowed to discriminate against subsidized organized 
settings such as CHCs. Currently, organized programs 
may not be recognized as providers by insurers or 
HMOs, and if they are recognized they may be paid 
only for physician services rather than via an in¬ 
stitutional rate. Depending on their design, financing 
reforms can increase the capacity of direct delivery 


90 Sarah S. Brown, Ed., Prenatal Care: Reaching Mothers, Reaching In¬ 
fants—Summary and Recommendations (Washington, D.C.: Institute of Medi¬ 
cine, National Academy Press, 1988), 14. 


providers. If insurance covers patients previously un¬ 
insured or underinsured, delivery systems can then 
use their State, Federal or private funds to develop 
additional facilities, to expand types of services and 
the number of patients served at existing facilities, and 
to provide additional outreach and case management 
services. These support and facilitating services are 
often not appropriate for reimbursement through a 
general insurance program because they are difficult 
for insurers to validate and control. 

Recent Federal financing legislation has been 
moving in directions which will increase Medicaid re¬ 
imbursement to community based programs, and 
therefore enhance their ability to use other funds to 
reduce barriers to care. Specifically, the Medicaid 
program has been revised several times to expand eli¬ 
gibility to mothers and young children. Also, under 
the Reconciliation Act just passed by the Congress, 
effective April, 1990, all Federally funded C/MHCs 
as well as other primary care centers that meet similar 
qualifications will be reimbursed by Medicaid at 100 
percent of reasonable costs. Additionally, effective 
April 1990, centers in all States are recognized as a 
provider for purposes of Medicaid reimbursement. 
Unlike the previous rules, in which CHCs in certain 
States have been paid based on individual physician 
fees and/or rates considerably less than cost, the new 
legislation acknowledges and pays for the increased 
expenses associated with providing comprehensive, 
case-coordinated primary care. 

Table 1 illustrates the relationship between Feder¬ 
ally funded C/MHCs and financing reforms. With sig¬ 
nificant increases in insurance coverage, for the same 
amount of grant funds, the number of persons served 
could be increased from 6.2 to 8.4 million and the 
range of services increased to provide outreach, pre¬ 
vention and support services for all users. This as¬ 
sumes that (1) insurance will cover clinical services 
and case management for all persons served, (2) grant 
or other funds will be used for special outreach, 
health promotion/disease prevention, support and fa¬ 
cilitating services, and (3) the total number of users is 
determined by the availability of grant and other 
funds. 


Delivery Reform 

Financing reforms are necessary but not sufficient 
in improving access to health care. Even if com¬ 
prehensive health care were financed completely for 
everyone, non-financial barriers would still prevent 
many people from receiving effective, timely, care. 
The inadequacy of financing reforms alone was noted 


118 



by the National Governors Association (NGA) fol¬ 
lowing the recent implementation by many States of 
Medicaid expansions for pregnant women and their 
infants. Specifically, the NGA found that some com¬ 
munities in isolated rural or high risk inner city areas 
lacked health care providers and facilities. Even 
where there were providers, many physicians in the 
private sector were unwilling or unable to take on ad¬ 
ditional patients, and continuity of care was fre¬ 
quently lacking. They were not prepared to offer the 
broad spectrum of preventive, support and facilitating 
services needed by a disadvantaged population. 91 
Gail Wilensky has similarly noted that insurance 
schemes alone are insufficient. She has stated that 
“For some populations—those who are difficult to 
reach or have special needs . . . specially targeted 
programs directed to providers who are trained and 
equipped to deal with these special populations are 
likely to be more efficient and effective than general¬ 
ized insurance programs.” 92 


Table 1 How Increased Reimbursement Affects 
Capacity and Services in C/MHCs 



Current Policy 
(1988) 

Full 

Implementation 
of Reforms 
Enacted in 1989 

Full Insurance 
Coverage of All 
Persons and All 
Clinical Services 

Federal Grant. 

$440m. 

.. S480m. 

$48 Om 

Patient/Third Party 

417. 

457. 

1,192 

Payments. 




Other Funds. 

158. 

J 158. 

158 





Total Revenues... 

1,015. 

.. 1,095. 

1,830 

Persons Served. 

5.7 million. 

6.2 million... 

8.4 million 

Cost/person. 

$178. 

.. SI 78. 

S218 


1. Figures are not adjusted tor inflation 

2. Clinical services represent 80% of total costs currently in columns 1 and 2; 
65% in column 3. In column 1 the total cost per person is Si 78, of which clinical 
costs are 80% of that or $142. $142 is 65% of $218, the cost/person in column 3. 
This increase in cost/person from $178 to $218 reflects increased outreach and 
support services. 

3. Federal grant funds in columns 2 and 3 based on FY 1990 appropriation less 
program support and lag in outlays for calendar year. 

Direct support of organized primary care programs 
is required to meet the special needs of certain popu¬ 
lation groups whose needs cannot be met solely 
through the provision of private or public health in¬ 
surance. Strategies for this support are described 
below. 

Facilities—Support for organized primary care de¬ 
livery systems should be maintained at a level which, 
in conjunction with financing reforms, allows an in¬ 
crease in the number of sites, as well as increases in 


91 Ian T. Hill, “Broadening Medicaid Coverage for Pregnant Women and 
Children." State Policy Responses (Washington. D.C.: National Governors 
Association, 1988). 

Gail Wilensky. "Filling the Gaps in Health Insurance," Health Affairs 7 
(Summer 1988): 141. 


the capacity of existing sites to serve additional per¬ 
sons. This could be linked to the concept of ensuring 
that underserved populations have a provider of last 
resort (i.e., local health department, freestanding 
clinic, reformed hospital outpatient department, or 
C/MHC). 

Personnel—Manpower development should be 
aimed at attracting and retaining health professionals 
in minority and other underserved areas. Strategies 
might include: (1) continued support of existing pro¬ 
grams such as the National Health Service Corps and 
minority health education programs; (2) promotion of 
the appropriate use of mid-level health professionals, 
through the development of model state practice acts; 
(3) examining proposals to address problems regard¬ 
ing professional liability and (4) development of pro¬ 
fessional support networks (e.g., telecommunications 
networks with other providers to provide adequate 
backup and support services). 

Outreach and Support Services—There should be 
targeted support for the development and delivery of 
innovative outreach and other social and support 
services which will facilitate access to and continued 
participation in health care. Strategies might include, 
but not be limited to: (1) demonstration grants to 
enlist volunteers from the community, along with the 
training and management necessary to ensure appro¬ 
priate use and retention of volunteers; (2) encouraging 
communities to provide free or reduced-cost trans¬ 
portation for pregnant women and other high risk, 
underserved groups; and (3) working with States and 
localities to promote availability of home visits by 
public health nurses in underserved areas. 

Coordination—Coordination could be improved 
through increased Federal financial, administrative 
and technical assistance support for coordination and 
co-location of services for underserved groups, par¬ 
ticularly vulnerable special population subgroups such 
as the homeless, pregnant women, and substance 
abusers. This includes support for (1) establishing one- 
stop shopping programs within C/MHCs and local 
health departments, and (2) simplifying and standard¬ 
izing eligibility requirements and procedures for 
public programs. 

Evaluation and Research—In order to ensure effec¬ 
tive and efficient use of resources, the Federal Gov¬ 
ernment should promote the development of systems 
to assess continuing gaps in access to care, help plan 
for a provider of last resort in every high need under- 
served area, and evaluate existing programs for their 
cost effectiveness and impact on health status. 


119 














































. 











LIMITING FAVORED TAX TREATMENT FOR 
EMPLOYEE HEALTH INSURANCE 


Marilyn Moon, Ph.D.* 


Proposals to expand health care coverage to the un¬ 
insured often suggest as a source of revenue a reduc¬ 
tion in the tax preferences given to those who have 
employer-paid coverage. Current tax law allows em¬ 
ployers to deduct their contributions to health insur¬ 
ance for employees as a cost of doing business, and 
employees are not required to declare this benefit as 
taxable income. Consequently, such benefits are not 
taken into account for either personal income or pay¬ 
roll (Social Security) taxes. The total revenue loss for 
both the employer and employee exclusions is pro¬ 
jected to be about $35 billion in 1989. 

All or a part of the health insurance premium paid 
by the employer could be treated as income and sub¬ 
jected to the personal income tax. The most popular 
proposal for taxation of health insurance is the “tax 
cap” approach. This approach would, for example, 
allow the continued exclusion from income of a por¬ 
tion of the health insurance premium, say $250 per 
month for family coverage, and tax only amounts 
above that level. In that way, many employees would 
continue to receive a tax free subsidy toward their in¬ 
surance costs, while very expensive policies would be 
partially taxed. 

Tax preferences for health insurance coverage have 
helped to stimulate employer participation and hence 
avoid the necessity for more public sector activity. In 
addition, because insurance represents an “in-kind” 
benefit, taxing it would ask individuals to pay in cash 
for a benefit that came in a restricted form (as insur¬ 
ance, not cash). The principle of not taxing such in- 
kind benefits has been long-standing, although options 
for taxing various in-kind benefits are increasingly 
being proposed as a means for further raising reve¬ 
nues. Opposition to taxing health benefits thus also 
arises from the precedent that would be set for taxing 

• This report prepared by Marilyn Moon, Ph.D., Senior Research Associa¬ 
tion, the Urban Institute. 


other in-kind benefits such as private pension 
contributions. 

Proponents and opponents of changing the tax 
status of health insurance benefits both argue about 
fairness—the subject of this memo. Proponents fault 
the disproportionate benefits that go to upper income 
workers who are more likely to have generous cover¬ 
age—and who benefit more because of the progres¬ 
sive nature of the income tax—as compared to less 
well off workers. Opponents of a change, on the 
other hand, cite many of the difficulties in fairly set¬ 
ting appropriate tax caps. The following discussion 
explores both sets of arguments. 


THE BASIC INEQUITIES OF THE 
CURRENT SYSTEM 

The major inequities of the current system cited 
by proponents of taxing insurance benefits relate to 
the share of the benefits that flow to a relatively 
small number of high income taxpayers. High-wage 
workers are more likely to be covered by their em¬ 
ployers, and when they are, the value of the benefits 
they receive is likely to be higher. In addition, if these 
benefits were to be taxed, they would be subject to 
higher marginal rates than the rates faced by 
noncovered workers. Thus, the tax benefits for each 
dollar’s worth of insurance are larger for those with 
high incomes. For example, exempting $1,000 worth 
of premiums saves a low income family only $150 in 
potential income taxes, but the same premiums result 
in $280 or $330 in tax savings to those with higher 
incomes. And for a very low-wage worker who pays 
no federal income tax, there is no tax subsidy 
whatsoever. 

The concept of base broadening suggests that all 
employer benefits ought to be subject to tax. Con- 


121 



sider, for example, the case of workers who can bar¬ 
gain either for higher wages or more health insurance. 
They are explicitly trading off one for the other, so 
why shouldn’t they pay taxes equally on both types of 
benefits? Bargaining units correctly recognize that in¬ 
surance benefits, which are not taxed, may actually be 
a better deal for employees who can give up one 
dollar of taxable income for one dollar of insurance 
that is not subject to tax. 

Many tax experts and health economists have rec¬ 
ognized that the exclusion encourages individuals to 
seek more health insurance coverage than is desirable 
from the standpoint of economic efficiency. That is, 
because the benefits cost them little or nothing, indi¬ 
viduals are inclined to seek more coverage than they 
would be willing to pay for if they had to bear the 
full cost. Moreover, individuals whose earnings come 
solely in cash (and who have no choice) effectively 
pay higher tax rates than other workers with 
nontaxed benefits in their total compensation package. 
Further, some would argue that the resulting lower 
revenues to the federal government from these tax ex¬ 
clusions mean a lower ability to fund public programs 
to meet the needs of persons who cannot afford to 
buy insurance, creating even further inequities. Thus, 
on both equity and efficiency grounds a good case 
can be made for taxing health insurance benefits. 


EQUITY PROBLEMS IN TAXING 
HEALTH INSURANCE 

The very fact that health insurance is an in-kind 
benefit creates some inherent inequities. The costs of 
such insurance vary widely even for similar policies, 
yet the recipient of insurance coverage may not con¬ 
sider that he or she is better off than a fellow worker 
just because the policy costs more. If services covered 
are the same, why should one individual be subject to 
more tax? 

If employer paid insurance premiums were sub¬ 
jected to the federal personal income tax, persons 
whose health insurance premiums were expensive— 
even if for no reason under their own control—would 
pay higher taxes. And the problem remains even 
under the tax cap approach. The intention of a tax 
cap is to discourage excessive coverage, while still 
allowing a tax break on the basic insurance premium. 
But, a single cap does not allow a distinction between 
excessive coverage and expensive coverage. Although 
the goal of taxing the insurance benefits is not to 
create a tax that varies by health status, the results 
could move in that direction if the inequities are 
severe. 


Another consequence of taxation of insurance bene¬ 
fits may be to discourage coverage of benefits such as 
preventive services. While some would argue that 
coverage beyond a minimum package should not be 
subsidized, other health analysts would argue that ad¬ 
ditional benefits ought to be encouraged. Choosing 
what represents excessive coverage (and hence setting 
a tax cap) would not be an easy task. 

Variance in insurance costs stems from a number of 
factors, some more difficult to deal with than others. 
First, levels of insurance premiums differ within a 
given region depending upon the size of the group 
being offered insurance. Large employers generally 
face lower costs per worker since the pool of individ¬ 
uals covered by insurance is very large. Employers 
with only a few workers find insurance costs to be 
particularly high—a trend that is increasing over time. 
These represent cost differences beyond the control 
of the employee who will be penalized if insurance 
premiums are taxed or taxed above some simple cap. 

Second, age and other demographic characteristics 
of workers in a particular employment setting may 
result in different insurance premiums. An employer 
with a large supply of older workers, for example, 
might face much larger insurance costs—and that 
could be further exacerbated if the business is a small 
one. All workers for that employer regardless of age 
would face higher than average tax liabilities for the 
benefits they receive. (Or, if differential premiums 
were to be applied, then older workers or women of 
child bearing ages might be singled out for heavy tax 
burdens.) 

Basic health care costs and patterns of actual use of 
services also show great differences by geographic lo¬ 
cation. Thus, someone in the northeast or north 
central United States experiences higher premiums— 
and thus potentially higher taxes—than someone in 
similar circumstances in the west or the south. Should 
individuals be taxed differently because the rates that 
providers charge vary? If they receive the same cov¬ 
erage, individuals may be able to argue appropriately 
that they should not be held accountable for differ¬ 
ences in hospital costs and doctors fees, for example. 
On the other hand, higher doctors fees tend to 
occur in high wage areas where workers are also 
likely to be paid more than, for example, their rural 
counterparts. 

Differences in premiums resulting from varying pat¬ 
terns of use of services pose an even more difficult 
problem since more care is received by those for 
whom higher premiums are charged. On the other 
hand, patterns of use may be more attributable to doc¬ 
tors’ decisions than to patient demand. We know, for 


122 


example, that practice patterns differ around the 
country—in some areas many more procedures are 
performed than in other areas. If so, individuals could 
again argue that they should not be penalized through 
the tax system for differences in premiums that are 
largely beyond their control. 

Some proponents of a tax cap argue that the whole 
purpose of the cap is to put pressure on providers to 
deal with each of these potential problems. When in¬ 
dividuals are faced with having to pay higher taxes, 
they will presumably demand reforms in the insurance 
market. This competitive approach assumes that indi¬ 
viduals and their employers will be able to have 
enough purchasing power to force improvements in 
the market. 


SOME SOLUTIONS TO THE 
INEQUITIES 

Several options exist to reduce the inequities cre¬ 
ated by taxing insurance premiums. Differential caps 
could be specified depending upon region of resi¬ 
dence. But other differences discussed above will vary 
by firm, so some further adjustment might be needed. 
For example, an index might be assigned to each indi¬ 
vidual’s reported insurance amount to adjust for dif¬ 
ferences in the premiums that reflect factors other 
than scope of coverage. Such an index might be cal¬ 
culated by insurers to reflect differences in the actu¬ 
arial costs to firms as compared to a national average 
for some standard policy. That index could then be 
used, for example, to lower the reported taxable value 
of unusually high premiums. 

Employees of large firms are already likely to be 
relatively well protected from arbitrary variations in 
the cost of premiums if a firm-wide average is used to 
calculate the premium. That is, if the pool of em¬ 


ployees is large enough and covers many areas of the 
country, average premiums are likely to wash out ar¬ 
bitrary differences. Similarly, small firms could be 
better insulated if their insurance costs were modified 
by creating large risk pools that would also implicitly 
weight all the various reasons for insurance premium 
differences and average them out. Such averaging 
would likely help small firms with high costs, but if 
confined to a particular region would not address the 
issue of geographic variation in insurance costs. 

When combined with other health care proposals, a 
tax cap could also avoid most of the equity issues 
raised here. Consider, for example, the tax cap in 
combination with an employer mandate. If the cap is 
set at or above the amount needed to buy the man¬ 
dated package, covered individuals would only pay 
tax when their insurance was more comprehensive 
than the standard package. And since many mandated 
insurance proposals would include options for small 
employers to have access to affordable insurance, pre¬ 
miums should show less variation as compared to the 
current insurance market. In fact, any reform that im¬ 
proves the private market for insurance could help. 
For example, if improved risk pooling enabled small 
firms to buy less expensive insurance, employees 
would not face taxes on unnecessarily high insurance 
premiums. 

In that sense, combining tax cap financing with 
health care proposals that result in more reasonably 
priced insurance complement each other well and 
reduce one of the major objections to taxing a portion 
of employer-paid health insurance premiums. On the 
other hand, proposals such as expanding Medicaid 
coverage to more of the uninsured would do little to 
improve the private insurance market; financing such 
a proposal with a tax cap could be criticized on 
equity grounds unless some of the modifications de¬ 
scribed above were also made to the tax cap. 


123 


28-861 


90 - 5 : QL 3 





























































































FEWER RESOURCES, GREATER BURDENS: MEDICAL 
CARE COVERAGE FOR LOW-INCOME ELDERLY 
PEOPLE 


Diane Rowland, Sc.D.* 


EXECUTIVE SUMMARY 

This background paper, prepared for the Pepper 
Commission, profiles the economic and health status 
of the elderly population, examines the financial 
burden associated with obtaining health care services, 
and offers recommendations to improve protection. 
Particular emphasis is given to examining the burdens 
medical care expenses impose on low-income elderly 
people and the extent to which coverage to supple¬ 
ment Medicare can assist in alleviating burdens for 
this group. 

Today, 3.5 million elderly people are poor with in¬ 
comes below the Federal poverty level of roughly 
$6,000 per year. Another 8.2 million are near-poor 
with incomes between 100 and 200 percent of the 
poverty level. Overall, 40 percent of the elderly 
population is poor or near-poor, but women, those of 
advanced age, and minorities are more likely to be 
low-income. Low-income elderly people are more 
likely to be in poor health and suffer from chronic 
conditions requiring ongoing medical care than other 
elderly people. 

Nearly all elderly Americans receive their basic 
health insurance protection from Medicare, but the 
coverage available is less than comprehensive. In ad¬ 

• This report prepared for the U.S. Bipartisan Commission on Comprehen¬ 
sive Health Care (The Pepper Commission), by Diane Rowland, Sc.D., As¬ 
sistant Professor, Brookdale National Fellow, The Johns Hopkins University 
School of Hygiene and Public Health, Baltimore, Maryland, May 10, 1990. 

This paper was prepared under contract with the U.S. Bipartisan Commis¬ 
sion on Comprehensive Health Care. The views expressed in the paper are 
those of the author and should not be attributed to the Commission, The 
Johns Hopkins University, or the Brookdale Foundation. The author wishes 
to express her appreciation to Barbara Lyons and Alina Salgantcoff for their 
research support and Yael Fletcher for assistance with editing and preparing 
the graphics for the manuscript. The author also gratefully acknowledges the 
assistance of Sandra Christensen, Stephen Long, and Jack Rodgers of the 
Congressional Budget Office and Nancy Mathiowetz of the Agency for 
Health Care Policy and Research. 


dition to an annual premium of $343 in 1990 for Part 
B coverage, Medicare requires substantial cost-sharing 
for covered services, and no assistance is provided 
with prescription drugs. Most of the elderly (68 per¬ 
cent) have private insurance to protect against Medi¬ 
care’s cost-sharing requirements, but these policies are 
often not available or extremely costly for the 11.7 
million elderly Americans with low incomes. 

Although Medicaid is intended to cover premiums, 
cost-sharing and additional benefits for the elderly 
poor, restrictive income and asset levels for eligibility 
leave two-thirds of the poor and 90 percent of the 
near-poor outside Medicaid’s reach. As a result, low- 
income elderly people are less likely to have coverage 
to supplement Medicare than other elderly: a third of 
low-income elderly people rely solely on Medicare. 

Gaps in Medicare coverage, coupled with limita¬ 
tions in the reach of Medicaid, result in out-of-pocket 
payments for medical care that can be financially dev¬ 
astating for poor and near-poor elderly people with 
limited incomes. On average, low-income elderly 
people spend 14 percent of their per capita income on 
out-of-pocket costs in contrast to 7 percent of income 
for higher income people. Over a third of low-income 
elderly people incur catastrophic costs for medical 
care of over 15 percent of income compared to 6 per¬ 
cent of the non-poor; those needing hospital care are 
the hardest hit. 

Medicaid coverage improves access to medical care 
for low-income elderly people. Those with Medicaid 
coverage use medical care services at rates compara¬ 
ble to elderly people with private insurance to supple¬ 
ment Medicare. Those with only Medicare coverage 
are less likely to seek physician care and use lower 
levels of care despite similar health care needs. 


125 



Medicaid reduces the financial burden of out-of- 
pocket costs for medical care. Those with full 
Medicaid benefits have less than $300 in annual out- 
of-pocket spending compared to over $1,000 for un¬ 
covered poor and near-poor elderly people. Premiums 
for private insurance are a major contributor to out- 
of-pocket burdens for poor and near-poor elderly 
people. For low-income elderly people without Med¬ 
icaid, the financial burden from premium payments 
alone is over twice the total of out-of-pocket spending 
by those with Medicaid coverage. 

Medicaid “buy-in” assistance helps by paying the 
premium and cost-sharing for Medicare services, but 
restrictive eligibility criteria leave most low-income 
elderly without coverage. The Medicare Catastrophic 
Coverage Act of 1988 will broaden the buy-in assist¬ 
ance available to poor elderly people through Medi¬ 
caid. State Medicaid programs are required to make 
buy-in assistance available to all elderly people who 
have incomes below the poverty line and limited 
assets by 1992. Yet, gaps in coverage remain. States 
are not required to cover prescription drugs and poor 
elderly people who have more than $4,000 in assets 
and near-poor elderly people will remain outside the 
reach of Medicaid assistance. 

The scope of Medicaid protection should be further 
expanded to pay Medicare premiums and cost-sharing 
and cover prescription drugs for all low-income el¬ 
derly people with incomes below 200 percent of the 
Federal poverty level (roughly $12,000 in 1989). For 
the 3.5 million elderly people living on incomes below 
the poverty level, Medicaid would cover the full cost 
of these benefits without cost-sharing. The 8.2 million 
near-poor elderly people with incomes between 100 
and 200 percent of the poverty level would receive 
comparable assistance from Medicaid, but would con¬ 
tribute to premium and cost-sharing obligations and 
prescription drug costs on a sliding scale. The cost of 
this proposal is estimated to be $2.1 billion in addi¬ 
tional Federal revenue in 1990. State matching ex¬ 
penditures are estimated at $1.8 billion, for a total cost 
of $3.9 billion in 1990. 

Expanding Medicaid to more low-income elderly 
people is a highly targeted approach that would pro¬ 
vide immediate relief from medical burdens to the 
most vulnerable of the elderly population. Future ini¬ 
tiatives may look to broadening the scope of Medi¬ 
care coverage for all elderly people, but in the short 
run Medicaid reforms directed toward the low- 
income population can make a measurable difference 
in improving access to care and alleviating the finan¬ 
cial burdens associated with medical care services. 


Fewer Resources, Greater Burdens: 

Medical Care Coverage for Low-Income 
Elderly People 

One in three elderly Americans faces each day on a 
limited income that leaves little room for extra or un¬ 
expected expenses. When illness strikes, these poor 
and near-poor elderly Americans depend on Medicare 
for assistance with their medical bills, but Medicare 
does not provide complete protection. Many low- 
income elderly people have to struggle to finance the 
rest of their care from limited savings or by shifting 
income from other required needs. 

The Medicaid program is essentially the safety net 
to Medicare for many poor elderly people. Once cov¬ 
ered by Medicaid, an elderly person faces little risk of 
high out-of-pocket expenses. However, the impression 
that Medicaid supplements Medicare for all poor el¬ 
derly is false. Today, only a third of poor elderly 
people have Medicaid coverage to fill in Medicare’s 
cost-sharing, pay the Medicare Part B premium and 
provide additional benefits. 

Even with the recent extension of buy-in coverage 
to all elderly people with incomes below the poverty 
level under the Medicare Catastrophic Coverage Act 
of 1988, protection will be less than comprehensive 
and many of the poor will remain vulnerable. Restric¬ 
tive resource tests limit eligibility for many of the 
poor and others who are potentially eligible do not 
apply for Medicaid assistance. In part, this lack of 
participation results because the eligibility and benefit 
guidelines for Medicaid are complex and difficult to 
understand. If improvements in the Medicaid program 
are to benefit their intended population groups, effec¬ 
tive outreach programs must be developed and eligi¬ 
bility rules simplified. 

It is, however, near-poor elderly people who are 
most at-risk. Those with incomes between 100 and 
200 percent of poverty, roughly $6,000 to $12,000 per 
year in 1989, are generally not eligible for Medicaid. 
These near-poor elderly people are especially at risk 
for impoverishment as a result of medical expenses, 
yet eligibility for the catastrophic coverage buy-in 
provision stops at the poverty level and offers no pro¬ 
tection for those with incomes just above the $5,980 
poverty threshold. 

This background paper prepared for the Pepper 
Commission profiles the economic and health status of 
the elderly population, examines the financial burden 
associated with obtaining health care services, and 
offers recommendations to improve protection. Par¬ 
ticular emphasis is given to examining the burdens 


126 


medical care expenses impose on low-income elderly 
people and the extent to which coverage to supple¬ 
ment Medicare can assist in alleviating burdens for 
this group. The analysis presented here focuses on the 
medical care expenses of elderly people living in the 
community and does not examine long-term care costs 
or the acute care costs of nursing home residents. 


Poverty and Illness in the Elderly Population 

Despite general improvements in the economic situ¬ 
ation of the elderly population over the last two dec¬ 
ades, many elderly people continue to struggle on low 
or modest incomes. Forty percent of the nation’s 29 
million elderly people living in the community have 
incomes less than 200 percent of the Federal poverty 
level—roughly $12,000 for a single individual in 1989 
(Figure 1). For these 11.7 million poor and near-poor 
people, living on a fixed income can become particu¬ 
larly difficult if poor health places additional burdens 
on limited finances to pay for cost-sharing under 
Medicare or for medical services that are not cov¬ 
ered. Health status is thus an important component in 
assessing the overall economic well-being of the el¬ 
derly population. 

Figure 1 Distribution of the Elderly Population 
by Poverty Level, 1988 



Total ■ 29.0 million elderly people 

Poverty Levels : 

Poor ■ less than 100% poverty (3.5 million) 
Near-Poor • 100-199% poverty (8.2 million) 
Non-Poor ■ 200% poverty or greater (17.3 million) 

SOURCE: Congressional Budget Office estimates of the non-institutionalized eWerty 
based on the Current Population Survey. March 1989. 

Economic Status— In 1989, the federal poverty level 
was $5,980 per year for an individual and $8,020 for a 
couple. Twelve percent of the elderly population (3.5 
mill ion people) had incomes below this level and thus 


had to meet their daily living expenses on an income 
of less than $500 per month. Another 28 percent of 
elderly people (8.2 million people) were near-poor 
with incomes between 100 and 199 percent of the fed¬ 
eral poverty level. Together, these 11.7 million poor 
and near-poor people comprise the low-income el¬ 
derly population (Table 1). 


Table 1 Distribution of the Elderly Population by 
Poverty Level, 1988 



Number of 
People 

Percent 

Distribution 


On millions) 

Total Elderly. 

29.0 

100.0% 

Poor (less than 100% poverty). 

3.5 

12.0% 

Near-Poor (100-199% poverty). 

8.2 

28.4% 

100-149% Poverty. 

4.5 

15.6% 

150-199% Poverty. 

3.7 

12.8% 

Non-Poor (200% poverty or 
more). 

17.3 

59.6% 

200-299% Poverty. 

6.0 

20.8% 

300% Poverty or More. 

11.3 

38.8% 


SOURCE: Congressional Budget Office estimates of the non-institutionalized elderly 
population based on the Current Population Survey, March 1989. 


The likelihood of living on a low income is greatest 
for women, minorities, the oldest Americans, and 
those who live alone (Figure 2). Nearly half (46 per¬ 
cent) of elderly women and two-thirds (63 percent) of 
elderly minorities have incomes below twice the pov¬ 
erty level. The likelihood of being poor or near poor 
increases with age with over half (57 percent) of 
those age 85 and older in the low-income group com¬ 
pared to a third (35 percent) of 65-74 year olds. Re¬ 
flecting their older age distribution, elderly people 
who live alone are four times as likely to be poor as 
those who live with a spouse. Lower educational 
levels and residence in rural areas and the South are 
also associated with economic deprivation (Table 2). 

An examination of the demographic characteristics 
of the 3.5 million elderly people living in poverty 
shows the population to be predominantly female, dis¬ 
proportionately minority, and of advanced age (Table 
3). Women comprise almost three-quarters (72 per¬ 
cent) of poor elderly people, reflecting their lower 
wage levels during working years, the increased risk 
of financial devastation from widowhood, and longev¬ 
ity that exceeds savings. Although they account for 
only 10 percent of all elderly people, blacks and other 
minorities comprise one-quarter of all poor elderly 
people. Sixty percent of poor elderly people live 
alone and are especially vulnerable in times of illness 


127 




















because the financial strain caused by their low in¬ 
comes is complicated by the lack of support from a 
spouse, resulting in the need for more services. Al¬ 
though their predominance in the poor population is 
most striking, women, minorities, and those over 
age 85 are also over-represented in the near-poor 
population. 

The low-income elderly population is much more 
likely to rely heavily on publicly sponsored sources of 
income, including Social Security and Supplemental 
Security Income (SSI) than those who are economi¬ 
cally better off (Commonwealth Fund Commission, 
1987). In many cases, these sources of income provide 
just enough money to meet daily living expenses. In 
1988, the average Social Security benefit provided an 
annual income of only $5,800, just slightly above the 
Federal poverty level for an elderly individual of 
$5,677. Although SSI provides cash assistance to help 
the low-income elderly population, the Federal SSI 
benefit for a single individual is 74 percent of poverty 
and thus does not raise an impoverished elderly per¬ 
son’s income to the poverty level. 


Figure 2 Percent of Elderly Who Are Poor or 
Near-Poor by Sex, Race, Age and Living Ar¬ 
rangement, 1988 


Total Elderly 


White 

Black & Other Races 



Living With Spouse 
Living With Others 
Living Alone 


0% 20% 40% 

Percent 

H Poor VHI/h Near-Poor 


60% 


80% 


SOURCE: Congressional Budget Office estimates of the non-institutionalized elderly 
based on the Current Population Survey. March 1989. 


In addition to limited income, poor and near-poor 
elderly people have few financial assets to draw on 
when faced with high medical costs. Savings are not 
available to finance extended or expensive care. Over 


80 percent of the poor have less than $10,000 in finan¬ 
cial assets when the family home is excluded. The 
near-poor also have little in the way of financial re¬ 
sources with three-quarters of that population having 
less than $25,000 in assets (Kennell, 1990). 


Table 2 Distribution of the Elderly Population by 
Income Level and Selected Characteristics, 1988 



Total 

Elder¬ 

ly 

Total 

Poor 

Near- 

Poor 

Non- 

Poor 

<100% 

100- 

199% 

200% 
or more 

(Num¬ 
ber in 
mil¬ 
lions) 

Percent 
Distribu¬ 
tion * 

Percent 
Distribu¬ 
tion * 

Percent 
Distribu¬ 
tion * 

Total. 

29.0 

100.0% 

12.1% 

28.3% 

59.7% 

Age 






65-74. 

17.7 

100.0% 

10.2% 

24.9% 

65.5% 

75-84. 

9.2 

100.0% 

14.1% 

32.6% 

52.2% 

85+. 

2.1 

100.0% 

19.0% 

38.1% 

42.9% 

Sex 






Male. 

12.1 

100.0% 

8.3% 

24.8% 

66.9% 

Female. 

16.9 

100.0% 

14.8% 

30.8% 

54.4% 

Race 






White. 

26.0 

100.0% 

10.0% 

27.7% 

62.3% 

Black/Others. 

3.0 

100.0% 

30.0% 

33.3% 

36.7% 

Living Arrangement 






Alone. 

3.9 

100.0% 

23.6% 

40.4% 

37.1% 

With Spouse. 

16.5 

100.0% 

5.5% 

22.4% 

72.1% 

With Others. 

3.6 

100.0% 

13.9% 

27.8% 

58.3% 

Education 






Less than 8th Grade.. 

4.5 

100.0% 

26.7% 

40.0% 

33.3% 

8-12th Grade. 

18.3 

100.0% 

10.9% 

30.6% 

58.5% 

Higher than 12th 






Grade. 

6.3 

100.0% 

4.8% 

14.3% 

81.0% 

Residence 






SMSA. 

21.4 

100.0% 

10.7% 

27.1% 

62.1% 

Non-SMSA. 

7.6 

100.0% 

15.8% 

32.9% 

52.6% 

Region 






Northeast. 

6.6 

100.0% 

10.6% 

27.3% 

62.1% 

North Central. 

7.0 

100.0% 

10.0% 

30.0% 

61.4% 

South. 

10.0 

100.0% 

17.0% 

30.0% 

54.0% 

West. 

5.4 

100.0% 

7.4% 

25.9% 

66.7% 


* Rows of percents may not add to total due to rounding. 

SOURCE: Congressional Budget Office estimates of the non-institutionalized elderly 
population based on the Current Population Survey, March 1989. 


When illness strikes an elderly individual or their 
spouse, high out-of-pocket expenses can quickly de¬ 
plete these limited resources. The burden of caring for 
a sick spouse, and perhaps ultimately shifting care to a 
nursing home, can exhaust the financial resources of a 
couple and leave the spouse remaining in the commu¬ 
nity bereft of both spouse and necessary support. 
Many of the women who live out their lives alone 
and in poverty have had their futures compromised 
by the illness and death of a husband. Others become 


128 





















































impoverished by their own medical bills as chronic 
care and longer life draw down economic resources. 

Health Status—The burden of illness is a serious 
problem for many poor and near-poor elderly people. 
Poor health status, multiple chronic conditions and 
functional limitations are all more prevalent among 
the low-income elderly population than those with 
higher incomes. These conditions increase the need 
for and utilization of medical services which in turn 
increases the financial burden for cost-sharing and un¬ 
covered medical expenses. 


Table 3 Characteristics of the Elderly Population 
by Income, 1988 



Total 

Poor 

Near- 

Poor 

Non-Poor 

<100% 

200% or 
more 

100- 

199% 

Total Elderly (Number in 





millions). 

29.0 

3.5 

8.2 

17.3 

Percent Distribution 





Age 





65-74 . 

61.1 

50.8 

53.6 

66.8 

75-84 . 

31.6 

38.5 

36.9 

27.7 

85+. 

7.2 

10.7 

9.5 

5.5 

Sex 





Male. 

41.6 

27.7 

36.9 

46.7 

Female. 

58.4 

72.3 

63.1 

53.3 

Race 





White. 

89.6 

74.5 

87.7 

93.5 

Black/Others. 

10.4 

25.5 

12.3 

6.5 

Living Arrangement 





Alone. 

30.8 

60.7 

43.1 

18.9 

With Spouse. 

56.9 

24.6 

45.3 

69.0 

With Others. 

12.3 

14.7 

11.6 

12.1 

Education 





Less than 8th Grade. 

15.4 

35.5 

21.3 

8.5 

8-12th Grade. 

62.9 

56.9 

68.0 

61.7 

Higher than 12th Grade... 

21.7 

7.6 

10.6 

29.8 

Residence 





SMSA. 

73.7 

65.5 

69.9 

77.1 

Non-SMSA. 

26.3 

34.5 

30.1 

22.9 

Region 





Northeast. 

22.7 

19.8 

22.0 

23.6 

North Central. 

24.3 

20.2 

24.9 

24.8 

South. 

34.5 

48.2 

35.9 

31.0 

West. 

18.6 

11.7 

17.2 

20.6 


SOURCE: Congressional Budget Office estimates of the norwnstitutionaltzed eKJerty 
population based on the Current Population Survey. March 1989. 


Poor health status has been shown to be highly 
predictive of the need for medical care (Manning, 
Newhouse and Ware, 1981). Overall, one-third of the 
elderly population reports their health as fair or poor, 
but low-income elderly people are much more likely 


to have fair or poor health than those with higher in¬ 
comes. Almost half (47 percent) of poor and 37 per¬ 
cent of near-poor elderly people report their health as 
fair or poor compared to 25 percent of non-poor el¬ 
derly people (Figure 3). 

Chronic conditions are more prevalent in the el¬ 
derly population than in the non-elderly population, 
but are particularly burdensome for low-income 
elders. Low-income people are more likely to have 
arthritis, hypertension, and vision problems than non- 
poor elderly people (Figure 4). For example almost 
two-thirds (62 percent) of poor elderly people suffer 
from arthritis that can impair mobility and result in 
the need for medication for treatment and pain relief. 
The prevalence is lower for the near-poor (53 per¬ 
cent) and lowest for the non-poor (48 percent) elderly 
population. 

Over half of poor elderly people have hypertension, 
17 percent have heart disease, and 9 percent have 
cerebrovascular disease (Table 4). The occurrence of 
these chronic conditions is consistently higher among 
the poor elderly than the near-poor or the non-poor. 
These conditions require physician monitoring and 
prescription drugs to maintain health status. Thirteen 
percent of poor elderly people have diabetes and most 
require insulin treatment as well as medical care for 
the many conditions that arise as complications to dia¬ 
betes. Vision and hearing problems also afflict over 40 
percent of poor elderly people. Although correctional 
aids can vastly improve functional ability and quality 
of life, they can be quite costly. 

Functional disabilities contributing to the need for 
long-term care assistance further compound the medi¬ 
cal problems of elderly people (Rowland, 1989). 
Twenty-one percent of poor elderly people report 
being restricted in one or more activities of daily 
living compared to 15 percent of the near-poor and 12 
percent of the non-poor. Elderly people with func¬ 
tional impairments are likely to be strained financially 
by non-medical needs and expenses, as well as by the 
need for additional services and special transportation 
arrangements to obtain medical care. 

In sum, poor and near-poor elderly people are more 
likely to be experiencing health problems for which 
they require medical services than elderly people who 
are economically better off, but they are less able to 
afford needed care because of their lower incomes. 
For those who need medical care and incur large out- 
of-pocket expenditures, medical expenses can lead to 
impoverishment. The extent to which insurance is 
available to assist with medical bills becomes a crucial 
factor. 


129 

































Figure 3 Percent of Elderly People Reporting 
Fair or Poor Health by Income, 1984 


percent 



INCOME LEVEL 


supplemental insurance, often called Medigap in¬ 
surance, in addition to their Medicare coverage. An 
additional eight percent of elderly people receive as¬ 
sistance from Medicaid because they are low income. 
Nearly a quarter (22 percent) of the elderly popula¬ 
tion is without supplementary coverage and relies 
solely on Medicare. They pay out-of-pocket for Medi¬ 
care cost-sharing and the cost of uncovered services. 
One percent of the elderly population is uninsured. 

The uninsured elderly population is a group of 
300,000 elderly people who are without Medicare or 
any other health insurance coverage (Table 5). Medi¬ 
care coverage is linked to eligibility for Social Secu¬ 
rity through one’s own or a spouse’s work history. 
Elderly people who have not participated in the 
Social Security program or who have not accrued an 
adequate work history may not be entitled to Medi¬ 
care benefits. For them, the cost of buying Medicare 
or private coverage may be prohibitive. As a result, 
America’s uninsured population also includes a small 
group of elderly people. 

Figure 4 Percent of Elderly Population With 
Selected Conditions, 1984 


SOURCE: Johns Hopkins University estimates of the non-institutionalized elderly 
based on the 1984 Supplement on Aging to the National Health Interview Survey. 


Health Insurance Coverage 

Nearly all elderly Americans receive their basic 
health insurance protection from Medicare. The 
design and scope of the Medicare benefit package was 
modeled after private health insurance coverage for 
the under-65 population with substantial coinsurance 
and deductibles. The Hospital Insurance (Part A) 
component provides fairly extensive coverage of 
short-term hospital care and limited coverage of post¬ 
acute skilled nursing facility and home health services. 
The Supplementary Medical Insurance (Part B) com¬ 
ponent of Medicare covers physician care and related 
ambulatory services and home health visits. Medicare 
beneficiaries are required to pay a premium for cover¬ 
age under Part B. 

The actual level of insurance protection among the 
elderly population varies substantially because many 
elderly people have private insurance and/or Medi¬ 
caid to supplement their Medicare coverage (Figure 
5). Almost 70 percent of elderly people have private 


Arthritis 


Hypertension 


Vision Problems ^ 


ADL Limitation ^ 


Mobility Limitation 



62% 


Poor 

Near-Poor 
1 I Non-Poor 


0 % 


20 % 


40% 


60% 


SOURCE: Johns Hopkins University estimates of the non-institutionalized elderly 
based on the 1984 Supplement on Aging to the National Health Interview Survey. 


130 






































Table 4 Health Status, Medical Conditions and 
Other Related Problems of the Elderly Popula¬ 
tion, 1984 




Poor 

Near- 

Poor 

Non- 

Poor 


Total 

<100% 

100- 

199% 

200% 

or 

more 

Percent of Elderly With Following 
Conditions: 





Fair or Poor Health. 

32.0 

47.3 

36.5 

24.9 

Chronic Conditions 





Arthritis. 

51.6 

62.1 

53.0 

47.9 

Hypertension. 

43.6 

51.8 

45.9 

39.9 

Heart Disease. 

16.0 

17.0 

16.2 

15.6 

Diabetes. 

10.0 

13.3 

10.8 

8.5 

Cerebrovascular Disease. 

6.5 

9.0 

7.1 

5.4 

Other Related Problems 





ADL Limitation *. 

14.2 

21.2 

15.0 

11.7 

IADL Limitation **. 

14.1 

22.9 

15.6 

10.7 

Mobility Difficulty. 

10.1 

17.3 

10.7 

7.8 

Hearing Problems. 

37.5 

42.0 

39.0 

35.3 

Vision Problems. 

29.4 

39.0 

30.4 

26.2 


* Limited in one or more of the following ADLs: Bathing, dressing, 
transferring, eating, or toileting. 

** Limited in one or more of the following I ADLs: Shopping, 
making meals, managing money or using the telephone. 

SOURCE: Johns Hopkins University estimates of the non-institutionalized elderly 
population based on the 1984 Supplement on Aging to the National Health Interview 
Survey. 

The pattern of insurance coverage varies signifi¬ 
cantly by income with private insurance to comple¬ 
ment Medicare most common among the non-poor 
elderly population and less extensive as a form of fi¬ 
nancing for the elderly poor (Figure 6). Among the 
poor elderly, one-third (34 percent) have Medicare 
and private coverage, one-third (34 percent) rely 
solely on Medicare, 29 percent have Medicare and 
Medicaid, and three percent are uninsured. For the 
near-poor elderly population, private coverage is 
more extensive with 59 percent reporting such cover¬ 
age while 10 percent have Medicaid and 31 percent 
rely solely on Medicare. Among the non-poor popula¬ 
tion, 80 percent have both Medicare and private cov¬ 
erage and only 16 percent rely solely on Medicare. 

In addition to the small group of uninsured elderly 
people, the group with Medicare-only coverage also 
faces substantial risk for out-of-pocket spending when 
illness strikes and cost-sharing levels under Medicare 
mount. Among the 29 million elderly Americans 
living in the community, 6.5 million rely solely on 
Medicare (Table 6). Low-income elderly people com¬ 
prise 57 percent of the Medicare-only population. 
Thus, any efforts at filling gaps in supplementary cov¬ 
erage will result in substantial assistance to the low- 
income elderly population. 


Figure 5 Health Insurance Coverage of Elderly 

People, 1988 


None 



Total ■ 29.0 million elderly people 

SOURCE: Congressional Budget Office estimates of the non-institutionalized etderty 
based on the Current Population Survey, March 1989. 


Table 5 Health Insurance Coverage of the 
Elderly Population, 1988 



Number 
of People 

Percent 

Distribu¬ 

tion 

(in 

millions) 

Total Elderly. 

29.0 

100.0% 

Medicare & Medicaid. 

2.4 

8.3% 

Medicare & Medicaid Only. 

1.9 

6.6% 

Medicare & Medicaid & Private. 

0.5 

1.7% 

Medicare & Private. 

19.8 

68.3% 

Medicare & Private. 

18.8 

64.9% 

Only Private. 

1.0 

3.4% 

Medicare Only. 

6.5 

22.4% 

None. 

0.3 

1.0% 





SOURCE: Congressional Budget Office estimates of the norwnstrtutionaJized elderty 
population based on the Current Population Survey, March 1989 


Private Supplementary Insurance—The most 
common insurance protection arrangement for elderly 
people combines Medicare and private insurance cov¬ 
erage to help with Medicare cost-sharing. Private sup¬ 
plementary policies vary considerably in the amount 
of coverage provided. Coverage of the Medicare 
copayments is standard and some policies also cover 
deductibles and other items, such as prescription 
drugs, that are not covered or partially covered by 
Medicare (Rice and McCall, 1985). 


131 





































Figure 6 Health Insurance Coverage of Elderly 
People by Income, 1988 



31 % 



59 % 


POOR 


NEAR-POOR 



80% 

NON-POOR 


□ 

onm 


Medicare Only 
Medicare & Medicaid 
Medicare & Private 
None 


SOURCE: Congressional Budget Office estimates of the non-institutionalized elderly 
based on the Current Population Survey, March 1989. 


The comprehensiveness and cost of private supple¬ 
mental insurance is related to how an elderly indi¬ 
vidual obtains this coverage. Forty-six percent of 
those with private supplemental insurance obtain cov¬ 
erage under group policies from current or former 
employers (Monheit and Schur, 1989). In most of 
these situations, the employer pays some or all of the 
cost of the insurance policy as a retirement benefit. 
The other 54 percent of elderly people with private 
supplemental coverage purchase individual policies 
themselves. Both group and nongroup insurance poli¬ 
cies cover nearly all hospital and inpatient physician 
care, but individual policies tend to provide less cov¬ 
erage for other services, particularly outpatient diag¬ 
nostic care and prescribed medicines, dental care and 
mental health. The cost of individual policies is high, 
ranging from about $500 to $1,300 per year (Con¬ 
sumer’s Union 1989). 


With basic policies costing more than $500 per year, 
it is striking that a third of poor elderly people are 
potentially committing over 10 percent of their in¬ 
comes just to pay the premiums for private insurance 
coverage. The near-poor elderly population is also fi¬ 
nancially pressed, yet over half elect to purchase pri¬ 
vate coverage. 


Table 6 Health Insurance Coverage of the 
Elderly Population by Income, 1988 




Poor 

Near- 

Poor 

Non-Poor 


Total * 




<100% 

100- 

199% 

200% or 
more 

Total Elderly (Number in 





millions). 

29.0 

3.5 

8.2 

17.3 

Medicare Only. 

6.5 

1.2 

2.5 

2.7 

Medicare & Private **. 

19.8 

1.2 

4.8 

13.8 

Medicare & 

Medicaid ***. 

2.4 

1.0 

0.8 

0.6 

None. 

0.3 

0.1 

0.0 

0.1 

Percent Distribution 





Total Elderly. 

100.0% 

100.0% 

100.0% 

100.0% 

Medicare Only. 

22.4% 

34.3% 

30.5% 

15.6% 

Medicare & Private. 

68.3% 

34.3% 

58.5% 

79.8% 

Medicare & Medicaid. 

8.3% 

28.6% 

9.8% 

3.5% 

None. 

1.0% 

2.9% 

0.0% 

0.6% 

Total Elderly. 

100.0% 

12.1% 

28.3% 

59.7% 

Medicare Only. 

100.0% 

18.5% 

38.5% 

41.5% 

Medicare & Private. 

100.0% 

6.1% 

24.2% 

69.7% 

Medicare & Medicaid. 

100.0% 

41.7% 

33.3% 

25.0% 

None. 

100.0% 

33.3% 

0.0% 

33.3% 


* Total may not add due to rounding. 

* * Some individuals, such as federal or state employees, have insurance other 
than Medicare. 

*** Some individuals also have private insurance. 

SOURCE: Congressional Budget Office estimates of the non-institutionalized elderly 
population based on the Current Population Survey, March 1989. 


The high cost of private coverage results in low- 
income elderly people being less likely to purchase 
private insurance coverage than more economically 
advantaged elderly people. Low income elderly 
people are also less likely to have had the types of 
jobs during their working years that offer private 
health insurance coverage after retirement as a bene¬ 
fit. As a result, 80 percent of non-poor elderly people 
have private insurance compared to 34 percent of 
poor and 58 percent of near-poor elderly people. 


Medicaid Coverage—One of the reasons poor and 
near-poor elderly people turn to private insurance is 
that many are unable to obtain assistance from Medi¬ 
caid. Overall, eight percent of all elderly people 
receive assistance from Medicaid to supplement Medi¬ 
care’s coverage of medical expenses. For these 
people, the Medicaid program functions like a private 
insurance supplementary policy by filling in Medi¬ 
care’s cost-sharing. However, Medicaid coverage pro¬ 
vides better protection by also paying the Part B 


132 
































Medicare premium and covering additional benefits, 
most notably prescription drugs. For the most part, 
the Medicaid program thus provides more compre¬ 
hensive benefits to supplement Medicare than private 
insurance policies and eliminates the need to pay pre¬ 
miums for either Medicare or private coverage. 

Although the Medicaid program provides impor¬ 
tant coverage for some of the poorest elderly people, 
the impression that Medicaid supplements Medicare 
for all poor elderly people is false. In fact, the portion 
of the poor with Medicaid is the same as the portion 
with private insurance. Less than one-third (29 per¬ 
cent) of poor elderly people and 10 percent of near- 
poor elderly people have Medicaid coverage. 

There are several reasons why Medicaid falls short 
in assisting low-income elderly people. First, Medi¬ 
caid eligibility for elderly people is shaped predomi¬ 
nantly by Federal policy under the Supplemental 
Security Income (SSI) program which provides cash 
assistance to elderly and disabled persons. Because of 
the link to welfare, individuals must meet stringent 
income and asset eligibility criteria to obtain Medicaid 
coverage. Only 11 states set their Medicaid eligibility 
level at or above the poverty level (Figure 7). 

The average income standard for a single elderly 
individual under Medicaid in 1989 was 83 percent of 
poverty or $4,956 per year, but income eligibility cri¬ 
teria vary widely among states (Table 7). Most states 
provide Medicaid eligibility to those who meet the 
income criteria for receipt of cash assistance, although 
some employ higher standards for Medicaid under an 
option in the 1986 Omnibus Budget Reconciliation 
Act. The level ranges from a low of $2,904 (49 per¬ 
cent of poverty) per individual in North Carolina to a 
high of $8,796 (147 percent of poverty) in Vermont. 
An income of $5,000 is too generous for an elderly in¬ 
dividual to obtain Medicaid eligibility in most states. 
For couples, the average income standard for Medi¬ 
caid is 88 percent of poverty or $7,037 (Table 8). 
Again the standard varies widely among states from 
$3,696 or 46 percent of poverty in North Carolina to 
$13,392 or 167 percent of poverty in California. 

In 35 states elderly people with higher incomes can 
qualify for Medicaid assistance under the medically 
needy program option. In these states, if medical ex¬ 
penses reduce income to below the medically needy 
income level, individuals obtain Medicaid coverage. 
However, medically needy levels are set in relation to 
state standards for Aid to Families with Dependent 


Children coverage and are lower than general Medi¬ 
caid eligibility levels for the elderly and disabled. 
Thus, those with medical expenses must actually 
spend-down to a lower income standard than those 
eligible as SSI cash assistance recipients. Medically 
needy levels average 71 percent of poverty for indi¬ 
viduals and 65 percent of poverty for couples. 

Figure 7 State Medicaid Eligibility Criteria for 
Elderly Individuals,* 1989 


Number of States 



Income as a Percent of Poverty 

•Federal SSI benefit for elderly 
Individuals Is set at 74% of poverty. 

SOURCE: Rowland, Salganicoff, and Lyons, 1990. 

In addition to income limits, Medicaid also has 
severe asset limitations for eligibility. Houses are ex¬ 
cluded from resource limits, but savings and other 
possessions are not. Generally, to qualify for Medicaid 
eligibility, assets cannot exceed $2,000 for individuals 
and $3,000 for couples (Table 9). A few states have 
relaxed the asset limit to $5,000 for individuals and 
$6,000 for couples, but in most cases, the lower stand¬ 
ard applies. These asset levels are so stringent that 
less than half of the elderly poor and a quarter of the 
near-poor can meet the asset test for Medicaid 
(Kennell, 1990). 


133 













Table 7 Medicaid Income Eligibility Limits for Elderly Individuals, 1989 


State 

Full Medicaid Benefits 

Medically Needy Coverage 

Buy-in Only 

Income Level 

Income as 
Percentage of 
Poverty (a) 

Income Level 

Income as 
Percentage of 
Poverty 

Income Level 

Income as 
Percentage of 
Poverty 

Average. 

$4,956 

(b) 83% 

$4,257 

71% 

$5,259 

88% 

Alabama. 

$4,416 

74% 

_ 

_ 

$5,076 

85% 

Alaska. 

$8,220 

110%** 

— 

— 

$7,476 

100% 

Arizona. 

$5,088 

85%** 

— 

— 

$5,088 

85% 

Arkansas. 

$4,416 

74% 

$1,296 

22% 

$5,088 

85% 

California. 

$7,224 

121% 

$7,200 

120% 

(c) 


Colorado. 

$5,112 

85% 

_ 

_ 

$5,088 

85% 

Connecticut *. 

$6,672 

112% 

$5,424 

91% 

$5,088 

85% 

Delaware. 

$4,416 

74% 

— 

— 

(c) 


District of Columbia. 

$5,976 

100%** 

$4,692 

78% 

$5,976 

100% 

Florida. 

$5,976 

100%** 

$3,600 

59% 

$5,976 

100% 

Georgia. 

$4,416 

74% 

— 

— 

$5,076 

85% 

Hawaii *. 

$6,864 

100%** 

$4,284 

62% 

$6,864 

100% 

Idaho. 

$5,052 

86% 

— 

— 

$5,088 

85% 

Illinois *. 

NA 

NA 

$3,204 

54% 

$4,788 

80% 

Indiana *. 

$4,416 

74% 

— 

— 

$4,620 

77% 

Iowa. 

$4,416 

74% 

$5,592 

94% 

$5,076 

85% 

Kansas. 

$4,416 

74% 

$4,416 

74% 

$5,088 

85% 

Kentucky. 

$4,416 

74% 

$2,604 

44% 

$5,088 

85% 

Louisiana. 

$4,656 

78% 

$1,200 

20% 

$5,088 

85% 

Maine. 

$5,976 

100%** 

$4,800 

80% 

$5,088 

85% 

Maryland. 

$4,416 

74% 

$4,500 

75% 

$5,100 

85% 

Massachusetts. 

$5,976 

100%** 

$5,976 

100% 

$5,976 

100% 

Michigan. 

$5,076 

85%** 

$4,788 

80% 

$5,076 

85% 

Minnesota *. 

$4,416 

74% 

$4,824 

81% 

$5,088 

85% 

Mississippi. 

$5,088 

85%** 

— 

— 

$5,088 

85% 

Missouri *. 

$4,416 

74% 

— 

— 

$5,076 

85% 

Montana. 

$4,416 

74% 

$4,416 

74% 

$5,088 

85% 

Nebraska *. 

$5,100 

85%** 

$4,704 

79% 

$5,100 

85% 

Nevada. 

$4,848 

81% 

— 

— 

$5,976 

100% 

New Hampshire *. 

$4,584 

77% 

$4,584 

77% 

$5,088 

85% 

New Jersey. 

$5,976 

100%** 

$4,200 

70% 

$5,976 

100% 

New Mexico. 

$4,416 

74% 

— 

— 

$5,088 

85% 

New York. 

$5,508 

92% 

$5,508 

92% 

$5,988 

100% 

North Carolina *. 

$2,904 

49% 

$2,904 

49% 

$4,776 

80% 

North Dakota * . 

$4,416 

74% 

$4,140 

69% 

$5,088 

85% 

Ohio * . 

$3,768 

63% 

_ 

_ 

$4,788 

80% 

Oklahoma * . 

$5,184 

87% 

$3,300 

55% 

$5,388 

90% 

Oregon . 

$4,436 

74% 

$4,620 

77% 

$5,088 

85% 

Pennsylvania . 

$5,976 

100%** 

$4,896 

82% 

$5,976 

100% 

Rhode Island . 

$5,148 

86% 

$6,600 

110% 

$5,088 

85% 

South Carolina . 

$4,416 

74% 

— 

_ 

$5,976 

100% 

South Dakota . 

$4,416 

74% 

— 

— 

$5,088 

85% 

Tennessee. 

$4,416 

74% 

$2,100 

35% 

$5,088 

85% 

Texas. 

$4,416 

74% 

— 

— 

$5,088 

85% 

Utah. 

$4,416 

74% 

$4,044 

68% 

$5,976 

100% 

Vermont. 

$8,796 

147%** 

$8,796 

147% 

$5,139 

86% 

Virginia *. 

$4,416 

74% 

$3,000 

50% 

$5,088 

85% 

Washington. 

$4,752 

79% 

$4,752 

79% 

$5,088 

85% 

West Virginia. 

$4,416 

74% 

$2,400 

40% 

$5,076 

85% 

Wisconsin. 

$5,652 

95% 

$5,652 

95% 

$5,976 

100% 

Wyoming. 

$4,656 

78% 

— 

— 

$5,316 

89% 


NOTES: 

'209(b) states; may use more restrictive criteria than the SSI standard ($4,416 per year for individuals at 74% of poverty) to determine Medicaid eligibility. 
" 1986 OBRA eligibility level used. 

— Signifies option not covered by state. 

NA Information was not available. 

(a) Eligibility criteria is the higher of either state categorically needy or OBRA 1986 Buy-in eligibility criteria. 

(b) The Official Federal Poverty level for 1989 is $5,980/year for individuals, except in Alaska ($7,475/year) and Hawaii ($6,877/year). 

(c) Not effective until January 1, 1990. 

SOURCE: Rowland, Salganicoff, and Lyons, 1990. 


134 











































































Table 8 Medicaid Income Eligibility Limits for Elderly Couples, 1989 


State 

Full Medicaid Benefits 

Medically Needy Coverage 

Buy-in Only 

Income Level 

Income as 
Percentage of 
Poverty (a) 

Income Level 

Income as 
Percentage of 
Poverty 

Income Level 

Income as 
Percentage of 
Poverty 

Average. 

$7,037 

(b) 88% 

$5,225 

65% 

$6,897 

86% 

Alabama. 

$6,636 

83% 

_ 

_ 

$6,804 

85% 

Alaska. 

$12,180 

121%** 

— 

— 

$8,820 

88% 

Arizona. 

$6,828 

85%** 

— 

— 

$6,828 

85% 

Arkansas. 

$6,636 

83% 

$2,604 

32% 

$6,816 

85% 

California. 

$13,392 

167% 

$11,208 

140% 

(c) 


Colorado. 

NA 

NA 

_ 

_ 

$6,828 

85% 

Connecticut *. 

$8,556 

107% 

$7,212 

90% 

$6,828 

85% 

Delaware. 

$6,636 

83% 

— 

— 

(c) 


District of Columbia. 

$8,196 

102%’* 

$4,944 

62% 

$8,016 

100% 

Florida. 

$8,020 

100%** 

$3,600 

45% 

$8,020 

100% 

Georgia. 

$6,636 

83% 

_ 

_ 

$6,816 

85% 

Hawaii *. 

$9,216 

100%** 

$5,760 

62% 

$9,216 

100% 

Idaho. 

$6,936 

86% 

— 

— 

$6,816 

85% 

Illinois *. 

NA 

NA 

$3,996 

50% 

$6,420 

80% 

Indiana *. 

$6,636 

83% 

— 

— 

$6,192 

69% 

Iowa. 

$6,636 

83% 

$5,592 

70% 

$6,816 

85% 

Kansas. 

$6,636 

83% 

$5,700 

71% 

$6,816 

85% 

Kentucky. 

$6,636 

83% 

$3,204 

40% 

$6,816 

85% 

Louisiana. 

$6,876 

86% 

$2,304 

29% 

$7,512 

94% 

Maine. 

$8,016 

100%** 

$5,292 

66% 

$6,816 

85% 

Maryland. 

$6,636 

83% 

$5,004 

62% 

$6,900 

85% 

Massachusetts. 

$8,016 

100%** 

$8,016 

100% 

$8,016 

100% 

Michigan. 

$7,176 

89%** 

$6,696 

83% 

$6,816 

85% 

Minnesota *. 

$6,636 

83% 

$6,024 

75% 

$6,828 

85% 

Mississippi. 

$6,828 

85%** 

— 

— 

$6,828 

85% 

Missouri *. 

$6,636 

83% 

— 

— 

$6,816 

85% 

Montana. 

$6,636 

83% 

$4,596 

77% 

$6,816 

85% 

Nebraska *. 

$7,176 

89%** 

$4,704 

59% 

$6,828 

85% 

Nevada . 

$7,524 

94% 

— 

— 

(d) 


New Hampshire *. 

$6,648 

83% 

$6,648 

83% 

$6,828 

85% 

New Jersey. 

$8,016 

100%** 

$5,196 

65% 

$8,016 

100% 

New Mexico. 

$6,636 

83% 

— 

— 

$6,828 

85% 

New York. 

$7,908 

99% 

$7,908 

99% 

$8,028 

100% 

North Carolina *. 

$3,696 

46% 

$3,696 

46% 

$6,408 

80% 

North Dakota *. 

$6,636 

83% 

$4,800 

60% 

$6,828 

85% 

Ohio *. 

$6,636 

83% 

— 

— 

$6,420 

80% 

Oklahoma *. 

$8,172 

102% 

$4,092 

51% 

$7,224 

90% 

Oregon. 

$6,571 

82% 

$5,892 

73% 

$6,816 

85% 

Pennsylvania. 

$8,016 

100%** 

$5,100 

64% 

$8,016 

100% 

Rhode Island. 

$8,016 

100% 

$7,104 

89% 

$6,816 

85% 

South Carolina. 

$6,636 

83% 

— 

— 

$8,016 

100% 

South Dakota. 

$6,636 

83% 

— 

— 

$6,828 

85% 

Tennessee. 

$6,636 

83% 

$2,304 

29% 

$6,828 

85% 

Texas. 

$6,636 

83% 

— 

— 

$6,828 

85% 

Utah. 

$6,636 

83% 

$4,956 

62% 

$8,016 

100% 

Vermont . 

$8,796 

110%** 

$8,796 

110% 

$6,897 

86% 

VirniniA * . 

$6,636 

83% 

$3,696 

46% 

$6,816 

85% 

Wa«hinntnn . 

$6,900 

86% 

$6,384 

80% 

$6,816 

85% 

West Virginia. 

$6,636 

83% 

$3,300 

41% 

$6,816 

85% 


$8,616 

107% 

$7,092 

88% 

$8,016 

100% 

Wyoming. 

$6,876 

86% 

" 

~ 

$7,056 

88% 


criteria than the SSI standard ($6,636 per year for couples at 83% of poverty) to determine Medicaid eligibility. 


NOTES: 

* 209(b) states; may use more restrictive 
** 1986 OBRA eligibility level used. 

— Signifies option not covered by state. 

is 

(c) Not effective until January 1, 1990. 

(d) Nevada does not use a separate eligibility level for couples. 
SOURCE: Rowland, Salganicoff, and Lyons, 1990. 


135 











































































Table 9 Medicaid Resource Eligibility Limits for 
the Elderly Population, 1989 


State 

Individuals 

Couples 

Average. 

$2,242 

$3,384 

Alabama. 

$2,000 

$3,000 

Alaska. 

$2,000 

$3,000 

Arizona. 

$2,000 

$3,000 

Arkansas. 

$2,000 

$3,000 

California. 

$2,000 

$3,000 

Colorado. 

$2,000 

$3,000 

Connecticut *. 

$1,600 

$2,400 

Delaware. 

$2,000 

$3,000 

District of Columbia. 

$2,600** 

$3,000 

Florida. 

$5,000** 

$6,000** 

Georgia. 

$2,000 

$3,000 

Hawaii *. 

$2,000 

$3,000 

Idaho. 

$2,000 

$3,000 

Illinois *. 

$2,000 

$3,000 

Indiana *. 

$1,500 

$2,250 

Iowa. 

$5,000** 

$7,500** 

Kansas. 

$2,000 

$3,000 

Kentucky *. 

$2,000** 

$4,000** 

Louisiana. 

$2,000 

$3,000 

Maine. 

$2,000 

$3,000 

Maryland. 

$2,500** 

$3,000** 

Massachusetts. 

$2,000 

$3,000 

Michigan. 

$2,000 

$3^000 

Minnesota *. 

$3,000 

$6,000 ' 

Mississippi. 

$2,000 

$3,000 

Missouri *. 

$1,000 

$2,000 

Montana. 

$2,000 

$3,000 

Nebraska *. 

$2,000 

$3,000 

Nevada. 

$2,000 

$3,000 

New Hampshire *. 

$2,500** 

$4,000** 

New Jersey. 

$4,000** 

$6,000** 

New Mexico. 

$2,000 

$3,000 

New York. 

$3,250 

$4,950 

North Carolina *. 

$1,500 

$2,250 

North Dakota *. 

$3,000** 

$6,000** 

Ohio *. 

$1,500 

$2,250 

Oklahoma *. 

$2,000 

$3,000 

Oregon. 

$2,000 

$3,000 

Pennsylvania. 

$2,400** 

$3,000 

Rhode Island. 

$4,000** 

$6,000** 

South Carolina. 

$2,000 

$3,000 

South Dakota. 

$2,000 

$3,000 

Tennessee. 

$2,000 

$3,000 

Texas. 

$2,000 

$3,000 

Utah. 

$2,000 

$3,000 

Vermont. 

$2,000 

$3,000 

Virginia *. 

$2,000 

$3,000 

Washington. 

$2,000 

$3,000 

West Virginia. 

$2,000 

$3,000 

Wisconsin. 

$2,000 

$3,000 

Wyoming. 

$2,000 

$3,000 


* 209(b) States may use more restrictive criteria than the SSI standard ($2,000 in 
resources for individual) in determining eligibility for Medicaid. 

“Where state has a Medically Needy program with a higher resource standard 
than Categorically Needy program, the higher standard is reported. 

SOURCE: Rowland, Salganicoff, and Lyons, 1990. 


The “Medicare buy-in” provisions of the Medicare 
Catastrophic Coverage Act of 1988 will help expand 


the protection available to poor elderly people under 
the Medicaid program (Christensen and Kasten, 
1988). As of July 1992, all states will be required to 
provide Medicaid coverage for Medicare premiums 
and cost-sharing to all elderly individuals and couples 
with incomes below the poverty level and assets of 
less than $4,000 for individuals and $6,000 for couples. 
The new asset levels are twice as high as the SSI re¬ 
source standards. This provision was retained despite 
the repeal of most of the other parts of the Cata¬ 
strophic Coverage legislation. 

Under the Medicare buy-in provision, states pro¬ 
vide financial assistance to beneficiaries by paying the 
Medicare Part B premium as well as deductibles and 
coinsurance arising from use of covered medical serv¬ 
ices. Those covered by “buy-in” are referred to as 
“qualified Medicare beneficiaries or QMBs.” These in¬ 
dividuals, however, are still not eligible for full Med¬ 
icaid benefits, including services such as prescription 
drugs and hearing and vision care. Thus, the buy-in 
population has less comprehensive coverage than 
those who are entitled to full benefits (Rowland, 
Salganicoff, and Lyons, 1989). 

Medicaid assistance to poor elderly people is lim¬ 
ited because participation rates are low. It is estimated 
that half of beneficiaries potentially eligible for SSI 
and Medicaid coverage do not enroll (Commonwealth 
Fund Commission, 1987). About half of those not par¬ 
ticipating appear to be unaware of the program or of 
their own potential eligibility. Many elderly people do 
not appear to understand the benefits available under 
Medicaid and others are reluctant to apply to a wel¬ 
fare-based program. 

Medicaid provides even more limited assistance to 
the near-poor. Only 11 states cover individuals with 
incomes at or above the poverty level and no states 
provide assistance to individuals with incomes over 
150 percent of poverty. As a result, only 10 percent 
of the near-poor receive any assistance from Medi¬ 
caid. Many who are covered spend-down as a result 
of large medical bills. Without Medicaid coverage, 
the near-poor must pay Medicare premiums as well as 
purchase private insurance if they want help with 
Medicare cost-sharing. These premium payments 
alone can leave them economically strapped. 

Lack of Supplemental Coverage—The 6.5 million el¬ 
derly people who rely solely on Medicare for assist¬ 
ance with medical bills are particularly at-risk for 
impoverishment should they incur large medical bills. 
Poor and near-poor elderly people are the most likely 
to be without either Medicaid or private insurance to 
supplement Medicare. Thirty-four percent of poor 
and 28 percent of near-poor elderly people rely solely 


136 






































































on Medicare for assistance with their medical bills. 
For them, Medicare premiums and cost-sharing and 
payments for uncovered services are all out-of-pocket 
expenditures. Among elderly people who have only 
Medicare coverage, almost 60 percent are poor or 
near-poor. 

In sum, poor and near-poor elderly people often 
face large medical bills without the assurance that 
either Medicaid or privately purchased supplemental 
insurance policies will help fill Medicare’s gaps. Al¬ 
though it is not surprising that poor and near-poor el¬ 
derly people do not purchase private supplementary 
coverage at rates comparable to higher income el¬ 
derly people, the limited assistance provided by Med¬ 
icaid is disturbing because Medicaid is intended to 
assist low-income elderly people. 


Utilization of Health Services 

Lack of supplementary coverage to fill in gaps in 
Medicare coverage influences access to health care 
services by elderly people. Although Medicare cover¬ 
age is universal, ability to pay for Medicare’s cost- 
sharing requirements varies for elderly people at 
different income levels. When utilization of ambula¬ 
tory care services is examined after controlling for 
socioeconomic and health status differences, those re¬ 
lying solely on Medicare for coverage use fewer 
health services than those with supplementary cover¬ 
age from either Medicaid or private insurance 
(Table 10). 


Table 10 Use of Physician Services and Pre¬ 
scription Drugs by the Elderly Population by 
Insurance Coverage, 1987 



Total 

Medicare 

Only 

Medicare & 
Private 

Medicare & 
Medicaid 

Physician Visits * 





Percent With No 





Physician Visits. 

12% 

16% 

8% 

7% 

Number of Visits per 





User 

8.3 

6.3 

8.4 

8.4 

Number of Visits per 





Enrollee. 

7.3 

5.3 

7.8 

7.8 

Prescription Drug 





Use * 





Number of Prescriptions 





per User. 

17.9 

15.1 

18.8 

19.4 

Number of Prescriptions 





per Enrollee. 

14.7 

12.0 

16.6 

16.8 


• Predicted utilization adjusted for socioeconomic and health characteristics. 
SOURCE: Congressional Budget Office, 1989 based on analysts of the 198' 
National Medical Expenditure Survey. 


Figure 8 Utilization of Physician Services * by 
the Elderly Population by Insurance Coverage, 
1987 


Percent of Elderly with No 
Physician Visits in Past Year 


Percent 



Annual Physician Visits 

Number per user 

r 



•adjusted for socioeconomic characteristics 
and health status 

SOURCE: Congressional Budget Office, 1989 based on analysis of the 1987 National 
Medical Expenditure Survey. 

Elderly people with Medicare-only coverage are 
twice as likely to have no physician visits during a 
year as those with supplemental coverage. Sixteen 
percent of elderly people with Medicare only report 
no physician visits in contrast to eight percent of 
those with private insurance and seven percent of 
those with Medicaid (Figure 8). Among those who 
use physician services, adequacy of financial protec¬ 
tion through coverage to supplement Medicare again 
plays a significant role. After adjusting for health 
status, the elderly users of physician care with Medi¬ 
care-only coverage average 6.3 physician visits per 


137 










































year compared to 8.4 visits for those with Medicaid 
coverage or private insurance to supplement 
Medicare. 

Access for physician services has spillover effects 
on utilization of other health care services. Physicians 
prescribe medications for their patients and Medicare 
beneficiaries, especially those in fair or poor health, 
are heavy users of prescription drugs (Moeller and 
Mathiowetz, 1989). It is therefore not surprising that 
the lower levels of physician care for those with 
Medicare-only coverage are also associated with re¬ 
duced levels of prescription drug use. The Medicare- 
only population averages 12 prescriptions per year 
compared to 16 for the privately insured population 
and 17 prescriptions for the Medicaid population 
(Figure 9). Since Medicare does not cover prescrip¬ 
tion drugs, but Medicaid and some private insurance 
plans do, the combined influence of economic cost 
and physician access undoubtedly contributes to the 
lower use levels by the Medicare-only population. 

Figure 9 Utilization of Prescription Drugs * by 
the Elderly Population by Insurance Coverage, 

1987 


Number per Enrollee 



Total Medicare Medicare Medicare & 
Elderly Only & Private Medicaid 


•adjusted for socioeconomic 
characteristics and health status 

SOURCE: Congressional Budget Office, 1989 based on analysis of the 1987 National 
Medical Expenditure Survey. 


Similarly, the hospitalization rates for the elderly 
appear to have both economic and physician access 
implications. The poor without coverage to supple¬ 
ment Medicare have 26 hospitalizations per 100 
people compared to 46 hospitalizations per 100 for the 
privately insured non-poor population (Figure 10). Al¬ 
though the poor who report their health as fair or 
poor fare better, they still lag behind those with better 
insurance coverage. After adjusting for health status, 
the poor population with Medicare-only coverage has 
a hospitalization rate of 42 hospitalizations per 100 
people compared to 57 hospitalizations per 100 non¬ 
poor elderly people. Despite poor health status, el¬ 
derly people with incomes at or below poverty who 
are at risk for full payment of Medicare’s hospital de¬ 
ductible and cost-sharing burdens appear to receive 
less care than their more affluent and better insured 
counterparts. 

Figure 10 Hospitalization Rates for Selected 
Groups of Elderly People, 1984 


Hospital Admissions per 100 persons 



Total Elderly In Fair 

Elderly or Poor Health 


SOURCE: Johns Hopkins University estimates of the non-institutionalized elderly 
based on the 1984 Supplement on Aging to the National Health Interview Survey. 


Financial Burden for Medical Care 

Medicare provides essential protection for medical 
care expenses for elderly Americans by financing 


138 


























most hospital and physician care. Yet Medicare cov¬ 
erage is neither comprehensive nor free. Many acute 
care services, most notably prescription drugs, dental 
care, and vision and hearing services, are not covered 
by Medicare. The elderly contribute to Medicare by 
paying a monthly premium for physician services 
under Part B and paying cost-sharing and deductibles 
when services are used. 

The financial burden associated with out-of-pocket 
payments for Medicare premiums and services can be 
substantial, especially for low-income elderly people. 
In 1990, the hospital deductible is $542 per spell of ill¬ 
ness combined with a $75 deductible and 20 percent 
coinsurance on most Part B services (Figure 11). 
Those with extended hospital stays or multiple admis¬ 
sions can incur even greater liabilities (Christensen, 
Long, and Rodgers, 1987). Moreover, regardless of 
use of health services, all beneficiaries pay a premium 
of $28.60 per month for Part B services, totalling $343 
for 1990. 


Figure 11 Medicare Benefits and Cost-Sharing 
Liabilities for Hospital and Physician Services, 
1990* 

Coverage Beneficiary Liability 

PART A 

Hospital Insurance for Inpatient Services 

Hospital deductible $542 per Admission 

Coinsurance Days 61-90 $148 per Day 

Coinsurance for 60 $296 per Day 

Lifetime Reserve Days 

PART B 

Supplementary Medical Insurance for Physician and Related 

Services 

Premium ($28.60 per month) $343 per Year 

Deductible $75 per Year 

Coinsurance 20% of Medicare 

Allowable Charge 

* Effective January 1, 1990. 

SOURCE: U.S. Congress, Ways and Means Committee, 1989. 

Medicare liabilities for the Part A and B 
deductibles and Part B cost-sharing average $491 for 
institutionalized and non-institutionalized Medicare 
enrollees (Table 11). The annual cost for Medicare 
services rises to $834 when the Part B premium pay¬ 
ment is included. These Medicare premiums and li¬ 
abilities constitute five percent of the mean income of 


$17,000 of elderly Medicare enrollees. The burden, 
however, falls heaviest on those with low incomes 
and represents 18 percent of the mean income for 
poor and ten percent for near poor Medicare benefici¬ 
aries in contrast to four percent of mean income for 
non-poor beneficiaries. Yet, Medicare liabilities alone 
understate the true financial burden for medical care 
for elderly people because the cost of uncovered 
services and premiums for private insurance are not 
included. 


Table 11 Cost-Sharing Liabilities for Elderly 
Medicare Enrollees * Resulting From the Use of 
Medicare Services, 1990 



Total 

Elderly 

Poor 

(less 

than 

100% 

poverty) 

Near- 

Poor 

(100- 

199% 

poverty) 

Non-Poor 

(more 

than 

200% 

poverty) 

Total Medicare Liability. 

$834 

$836 

$854 

$824 

Medicare Cost-Sharing. 

$491 

$493 

$511 

$481 

Hospital. 

$170 

$175 

$189 

$161 

Physician. 

$321 

$318 

$322 

$320 

Annual Medicare Part B 





Premium **. 

$343 

$343 

$343 

$343 

Mean Income. 

$17,170 

$4,709 

$8,893 

$22,592 

Medicare Liability as a Per- 





cent of Mean Income. 

5% 

18% 

10% 

4% 


* Includes both institutional and community-based elderly Medicare enrollees. 
** Premium effective as of January 1, 1990. 

SOURCE: Christensen, S„ 1989. 


Out-of-Pocket Spending and Income—On average, 
elderly people living in the community spend 11 per¬ 
cent of their per capita incomes on out-of-pocket pay¬ 
ments for Medicare cost-sharing, uncovered services, 
and premium payments (Figure 12). These expenses 
consume a greater portion of the income of low- 
income people than of higher income individuals 
(Feder, Moon, and Scanlon, 1987b). The poor and 
near-poor with per capita incomes of less than $10,000 
spent an average of 14 percent of income on medi¬ 
cally-related expenses compared to seven percent of 
income for the non-poor elderly population with in¬ 
comes above $10,000. 

The components of out-of-pocket medical spending 
by the elderly population reveal the substantial share 
of spending attributable to premium payments (Figure 
13). Over half of all out-of-pocket costs of elderly 
people are for premiums. The Medicare Part B pre¬ 
mium accounts for 16 percent of total spending and 
payments for private supplementary coverage consti¬ 
tute 40 percent of total spending. Prescription drugs 
account for 12 percent of spending (Table 12). An ex¬ 
amination of out-of-pocket spending by income shows 


139 
















that drugs are a higher share of out-of-pocket spend¬ 
ing for lower income elderly people than those more 
economically advantaged. 

Figure 12 Out-of-Pocket Expenses for Medical 
Care as a Percent of Per Capita Income, 1986 


Percent 



Total Elderly Low-Income Higher-Income 

Elderly Elderly 


Note: Low Income ■ $10,000 or leas; 

Higher Income ■ More than $10,000 

SOURCE: Feder, Moon, and Scanlon, 1987 based on analysis of the 1980 National 
Medical Care Utilization and Expenditure Survey. 

The difference in spending between lower and 
higher income people is not due to a heavier premium 
burden for low-income people. Excluding the Medi¬ 
care Part B premium and the out-of-pocket payments 
for private health insurance premiums reduces overall 
spending for health care to four percent of income, 
but the poor continue to spend a higher proportion 
(12 percent of income) than other elderly people on 
cost-sharing and uncovered services (Kovar, 1986). 

Poor and near-poor elderly people with incomes 
below $10,000 are more likely to have catastrophic 
levels of out-of-pocket spending than other elderly 
people (Feder, Moon, and Scanlon, 1987a). Cata¬ 
strophic expenses are generally defined as expendi¬ 
tures at or above 15 percent of income. Using this 
definition, 37 percent of low-income elderly individ¬ 
uals in contrast to six percent of higher income indi¬ 
viduals have catastrophic expenses (Figure 14). The 
need for hospital care substantially increases the likeli¬ 


hood of catastrophic spending. Over half (56 percent) 
of low-income individuals with a hospital stay had 
catastrophic costs compared to 32 percent of low- 
income individuals without a hospital stay. 


Table 12 Out-of-Pocket Spending for Medical 
Care by the Elderly Population, 1989 



Total 

Elderly 

Poor 

(less than 
100% 
poverty) 

Near- 

Poor 

(100- 

150% 

poverty) 

Non-Poor 

(more 

than 

150% 

poverty) 

Total Elderly. 

$1,237 

$755 

$1,004 

$1,391 

Premiums *. 

$699 

$376 

$517 

$809 

Cost-Sharing and Non- 





Covered Services. 

$393 

$265 

$330 

$435 

Drugs. 

$145 

$114 

$157 

$148 

Percent Distribution 





Total Elderly. 

100% 

100% 

100% 

100% 

Premiums *. 

56% 

50% 

51% 

58% 

Cost-Sharing and Non- 





Covered Services. 

32% 

35% 

33% 

31% 

Drugs. 

12% 

15% 

16% 

11% 


* Indicates premiums for Medicare Pari B and private supplemental insurance. 
SOURCE: Johns Hopkins University estimates based on Georgetown Policy Associ¬ 
ates, 1987 analysis of the 1980 National Medical Care Utilization and Expenditure 
Survey. 


Figure 13 Components of Out-of-Pocket 
Spending for Medical Care, 1989 



Physician 

Services 

16% 

Total ■ $1,237 per elderly person 

SOURCE: Johns Hopkins University based on Georgetown Policy Associates analysis 
of the 1980 National Medical Care Utilization and Expenditure Survey. 

Role of Insurance: Medicaid and Medigap —Medi¬ 
caid and private supplementary insurance are essential 
complements to Medicare coverage for those with se¬ 
rious illness and the need for hospitalization. Low- 
income elderly people with a hospital stay who are 
only covered by Medicare spend 23 percent of their 


140 






















































income on medical expenses compared to 20 percent 
for those with private insurance and 14 percent for 
those with Medicaid (Figure 15). However, for the 
healthier low-income elderly without the need for 
hospital care, private insurance is not a good use of 
limited resources. For low-income people without a 
hospitalization, out-of-pocket spending including pri¬ 
vate insurance premiums accounts for 17 percent of 
income in contrast to nine percent for those with 
Medicare only and seven percent for those with 
Medicaid. 


Figure 14 Percent of Elderly People With Out- 
of-Pocket Spending for Acute Care Exceeding 
15 Percent of Income, 1986 


Percent 


66 % 



Total Elderly Elderly with Elderly without 

a Hospital Stay a Hospital Stay 


Note: Low Income ■ $10,000 or less: 

Higher Income • More than $10,000 

SOURCE: Feder, Moon, and Scanlon, 1987 based on analysis of the 1980 National 
Medical Care Utilization and Expenditure Survey. 


Medicaid clearly helps to reduce fmancial burdens 
for those who are covered. The poor elderly popula¬ 
tion covered by Medicaid had out-of-pocket expenses 
of $287 per year in 1989 in contrast to expenses ex¬ 
ceeding $1,000 for the poor and near-poor without 
Medicaid coverage (Figure 16). Poor elderly people 
without Medicaid coverage paid twice as much for 
prescription drugs and four times more for cost-shar¬ 
ing and uncovered services than the poor with Medi¬ 
caid (Table 13). Medicaid coverage of prescription 
drugs helps reduce the economic barriers that impede 


utilization for the low-income elderly. Annual pre¬ 
scription drug expenditures for those with Medicaid 
are a third higher than expenditures for those without 
drug coverage (Mathiowetz, 1990). 


Figure 15 Out-of-Pocket Spending as a Percent 
of Income for Low-Income * Elderly People by 
Hospital Use and Insurance Coverage, 1986 


Percent 

30% r 


23% 



Elderly with 
a Hospital Stay 


Medicare Only 
V////A Medicare 4 Private 
i_I Medicare 4 Medicaid 


17% 



Elderly without 
a Hospital Stay 


•Income of $10,000 or less 

SOURCE: Feder, Moon, and Scanlon, 1987 based on analysis of the 1980 National 
Medical Care Utilization and Expenditure Survey. 


The greatest savings for those fortunate enough to 
have Medicaid coverage come from reduced premium 
payments. Those without Medicaid coverage pay 
more out-of-pocket in premium costs than their Med¬ 
icaid covered counterparts pay in total. The elderly 
poor who have buy-in coverage but are not entitled 
to full Medicaid benefits pay more out-of-pocket 
($433), but are still better off than those who are 
Medicare only or privately insured. 

For many near-poor elderly people medical ex¬ 
penses can reduce their meager incomes to levels that 
in effect shift them into poverty. A single elderly 
person with an income of $7,500 is technically not 
poor. However, if that individual had out-of-pocket 
expenses for cost-sharing and prescription drugs that 
exceeded $1,500, those expenses would reduce the 
income available for daily living expenses to below 


141 































the poverty level. In this way, many non-poor elderly B or Medigap, serious illness can bring financial 

people can actually become impoverished by their devastation, 

medical expenses. 


Figure 16 The Impact of Medicaid on Out-of- 
Pocket Spending for Medical Care by Low- 
income * Elderly People, 1989 


Dollars per Person 


L..1 Drugs 


Cost-Sharing & Non-Covered 
Services 



Full Buy-In Only Poor Near-Poor 

Medicaid 

Poor With Medicaid Without Medicaid 


•Poor • Less than 100% of Poverty 
Near-Poor • 100-160% of Poverty 

SOURCE: Johns Hopkins University estimates based on Georgetown Policy 
Associates analysis of the 1980 National Care Utilization and Expenditure Survey. 


Many near-poor elderly people are, in fact, the 
hidden poor. One-third of near-poor elderly people 
are reduced to poverty by their out-of-pocket pay¬ 
ments for medical care. Elderly people in higher 
income groups also suffer a reduced standard of living 
(Table 14). If poverty rates were calculated after de¬ 
ducting medical expenses from available income, the 
percent of elderly people who are living in poverty 
would increase from 12 percent to 17 percent 
(Figure 17). 

Premium payments to assure protection against un¬ 
expected or large medical expenses are a major con¬ 
tributor to the expenses impoverishing many elderly 
people. Medicare premiums and out-of-pocket pay¬ 
ments to purchase private Medigap coverage accounts 
for 40 percent of the out-of-pocket spending by the 
medically impoverished (Commonwealth Fund 
Commission, 1987). However, without Medicare Part 


Table 13 The Impact of Medicaid on Out-of- 
Pocket Spending for Medical Care by Low-In¬ 
come Elderly People, 1989 



Poor With Medicaid 

Without Medicaid 

Full 

Medicaid 

Buy-In 

Only 

Poor 

Near- 

Poor 

Total Elderly. 

$287 

$433 

$1,015 

$1,167 

Premiums *. 

$145 

$165 

$562 

$650 

Cost-Sharing and Non- 





Covered Services. 

$71 

$114 

$299 

$328 

Drugs. 

$71 

$154 

$154 

$189 

Percent Distribution 





Total Elderly. 

100% 

100% 

100% 

100% 

Premiums *. 

50% 

38% 

55% 

56% 

Cost-Sharing and Non- 





Covered Services. 

25% 

26% 

30% 

28% 

Drugs. 

25% 

36% 

15% 

16% 


Note: 

Poor = Less than 100% poverty 
Near-Poor = 100-150% poverty 

* Indicates premiums for Medicare Part B and private supplemental insurance. 
SOURCE: Johns Hopkins University estimates based on Georgetown Policy Associ¬ 
ates, 1987 analysis of the 1980 National Medical Care Utilization and Expenditure 
Survey. 


Expanding Medicaid coverage to more poor and 
near-poor elderly people would assist in moderating 
out-of-pocket expenditures for medical care and pre¬ 
miums and could help prevent impoverishment of 
many older people. Poor elderly people with Medi¬ 
caid coverage have the most comprehensive protec¬ 
tion while those with only coverage from Medicare 
are the most at risk of financial devastation from 
illness. 


Table 14 Shifts in Poverty Status Due to Medical 

Expenses 


Poverty Status Before Medical 
Expenses 

Poor 

(less than 
100% 
poverty) 

Near- 

Poor 

(100- 

149% 

poverty) 

Modest 

(150- 

299% 

poverty) 

Moderate 
to High 
(more 
than 
300% 
poverty) 

Poor (less than 100% 





poverty). 

100.0 




Near-Poor (100-149% 




poverty). 

32.3 

67.7 



Modest (150-299% pover- 



ty). 

0.3 

15.3 

84.4 


Moderate to High (300% 


poverty or more). 



12.3 

87.7 





SOURCE: Estimates prepared by Georgetown Policy Associates based on 1980 
National Medical Care Utilization and Expenditure Survey. 


142 






















































Figure 17 Poverty Among Elderly People Before 
and After Medical Expenses 


Percent 


WM Before HI After 


17% 



Total Elderly 


SOURCE: Commonwealth Fund Commission on Elderly People Living Alone, 1987. 


Plan for Reform 

The greater financial burdens of low-income people 
in comparison to the more affluent elderly population 
mean that access to care and use of appropriate medi¬ 
cal care can be placed in jeopardy by financial consid¬ 
erations. The lower utilization levels of the elderly 
population relying solely on Medicare coverage dem¬ 
onstrates the importance of adequate supplementary 
insurance to alleviate the financial burdens for Medi¬ 
care cost-sharing and, in some cases, assist with pay¬ 
ment for uncovered services, such as prescription 
drugs. 

Medicaid coverage to supplement Medicare is a 
highly targeted approach to improve access to medi¬ 
cal care, ease financial burdens, and eliminate the 
need for poor and near-poor individuals to pay pre¬ 
miums for private insurance. Use of medical services 
by those with Medicaid coverage is comparable to 
utilization levels by those with private insurance and 
significantly higher than that of the Medicare-only 
population. 


Medicaid coverage has also been shown to ease fi¬ 
nancial burdens significantly. Poor elderly people 
with Medicaid coverage spend less than $300 per year 
out-of-pocket compared to over $1,000 per year for 
the uncovered poor and near-poor elderly population. 
Much of the difference in out-of-pocket spending is 
due to premium payments and out-of-pocket spending 
for drugs by those without Medicaid. Payment of 
Medicare premiums and elimination of the need to 
purchase private coverage is, in fact, Medicaid’s 
greatest contribution to easing financial burdens for 
medical care among the low-income population. 

Medicaid currently operates as the safety-net 
Medigap plan for two million poor and near-poor 
Medicare beneficiaries, but Medicaid’s reach is lim¬ 
ited. Nearly 10 million low-income elderly people are 
not assisted by Medicaid and are left on their own to 
pay Medicare and insurance premiums and cover 
cost-sharing. When the Medicare buy-in provision of 
the Medicare Catastrophic Coverage Act is fully im¬ 
plemented in 1992, states will be required to pay the 
Medicare premium and cost-sharing requirements for 
all beneficiaries with incomes below the poverty 
level. However, some poor elderly people will not 
qualify because their assets exceed the permissible 
level of $4,000 for Medicaid eligibility and the 
provision does not extend to the near-poor elderly 
population. 

The scope of Medicaid protection should be broad¬ 
ened to pay Medicare premiums and cost-sharing and 
cover prescription drugs for all low-income elderly 
people with incomes below 200 percent of the Fed¬ 
eral poverty level (roughly 12,000 in 1989). On a per 
capita basis, the average cost of these benefits is esti¬ 
mated at about $1,250 in 1990 including $343 for the 
Medicare Part B premium, $500 for cost-sharing 
under Part A and B, and $425 for the prescription 
drug benefit. 

For the 3.5 million elderly people living on incomes 
below the poverty level, Medicaid would cover the 
full cost of these benefits without cost-sharing. The 
8.2 million near-poor elderly people with incomes be¬ 
tween 100 and 200 percent of the poverty level would 
receive comparable assistance from Medicaid, but 
would contribute to premium and cost-sharing obliga¬ 
tions and prescription drug costs on a sliding scale. 
Those with incomes from 100-149 percent of poverty 
would pay 25 percent of the cost and those with in¬ 
comes from 150 to 200 percent of poverty would con¬ 
tribute 50 percent. 

Eligibility for Medicaid assistance would be deter¬ 
mined solely on the basis of income, without regard 
to asset levels. Currently, individuals with assets in 


143 









excess of $4,000 and couples with assets above $6,000 
are generally ineligible for Medicaid coverage. Elimi¬ 
nating the asset test will simplify the eligibility 
process and remove some of the welfare stigma of 
Medicaid. It should help increase participation in 
Medicaid by low-income elderly people. 

This proposal would expand coverage to 9.9 million 
low-income elderly people currently without Medi¬ 
caid coverage (Table 15). Improved protection would 
be provided to 2.5 million poor elderly people. Al¬ 
though many of these people became eligible for buy- 
in assistance as a result of the Medicare Catastrophic 
Coverage Act, this proposal would expand Medicaid 
protection to also include coverage of prescription 
drugs. In addition, those previously excluded from 
buy-in assistance under MCCA as a result of the asset 
restrictions would now be eligible for Medicaid cov¬ 
erage. The largest group of beneficiaries are the 7.4 
million near-poor elderly people who would be newly 
eligible for assistance with Medicare premiums and 
cost-sharing and coverage of prescription drugs under 
the Medicaid program. 

The cost of this proposal is estimated to be $2.4 bil¬ 
lion in additional Federal revenues in 1990 (Table 16). 
State matching expenditures are estimated at $2.0 bil¬ 
lion, for a total cost of $4.4 billion in 1990. Within 
this plan, one-third of expenditures would be for im¬ 
proved protection of the poor elderly and the remain¬ 
der would be directed toward expanding coverage to 
the near-poor elderly population. As a result, Medi¬ 
caid buy-in assistance and prescription drug coverage 
would be available to supplement Medicare for all 
11.7 million low-income elderly Americans. 

Table 15 Number of New Eligibles Assisted by 
Proposal to Expand Medicaid Coverage of the 
Low-Income Elderly Population, 1990 


Number of Elderly People 
(millions) 



Total 

Current 

Medic¬ 

aid 

Benefi¬ 

ciaries 

New 

Medic¬ 

aid 

Eligibles 

Total Low-Income Elderly Population. 

11.7 

1.8 

9.9 

Poor Elderly People (less than 100% 




poverty). 

3.5 

1.0 

2.5 

Near-Poor Elderly People (100-200% 




poverty). 

8.2 

0.8 

7.4 


Note: New Medicaid eligibles includes those who were excluded from expansions 
of buy-in assistance under the MCCA due to asset restrictions. 

SOURCE: Johns Hopkins University estimates based on CBO analysis of the 
Current Population Survey, March 1989. 

These cost estimates are based on participation rates 
of 100 percent for the poor elderly who would be eli¬ 


gible to receive a fully subsidized benefit package and 
50 percent for the near-poor who would be required 
to make a sliding scale contribution based on income. 
Program experience has generally shown lower rates 
of participation for Medicaid largely due to lack of 
awareness about the program and potential eligibility, 
and difficulty in completing the eligibility process. As 
a result, Medicaid expansions must be accompanied 
by simplification of the eligibility process and commu¬ 
nity-level outreach programs if they are to reach their 
intended target populations. 

Table 16 Cost of Proposal to Expand Medicaid 
Coverage of the Low-Income Elderly Popula¬ 
tion, 1990 



Cost (billions of dollars) 


Total 

Federal 

State 

Total Low-Income Elderly Population. 

$4.4 

$2.4 

$2.0 

Buy-In Assistance. 

$2.2 

$1.2 

$1.0 

Prescription Drugs. 

$2.2 

$1.2 

$1.0 

Poor Elderly People (less than 100% 
poverty). 

$1.4 

$0.8 

$0.6 

Buy-In Assistance. 

$0.2 

$0.1 

$0.1 

Prescription Drugs. 

$1.2 

$0.7 

$0.5 

Near-Poor Elderly People (100-200% 
poverty). 

$3.0 

$1.7 

$1.3 

Buy-In Assistance. 

$2.0 

$1.1 

$0.9 

Prescription Drugs. 

$1.0 

$0.6 

$0.4 


Note: Buy-in assistance includes the Medicare Part B premium and cost-sharing for 
hospital and physician services. On a per capita basis, the cost of the total benefit 
package, including prescription drugs, is estimated to be about $1,250. 

Cost estimates assume a full year of implementation and a participation rate of 100 
percent for poor elderly who would be eligible to receive a fully subsidized benefit 
package and 50 percent for the near-poor elderly who would be required to make a 
sliding scale contribution based on income. Those with incomes between 100 and 
149 percent of poverty would contribute 25 percent of the total benefit cost and 
those with incomes between 150 and 200 percent of poverty would contribute 50 
percent. 

SOURCE: Author’s estimates based on Christensen, S., “Estimates for Aged 
Medicare Enrollees, 1990.” 

Improving Medicaid’s assistance to low-income el¬ 
derly people builds on the Medicare Catastrophic 
Coverage Act’s expansion of buy-in protection to 
Medicare beneficiaries with incomes below poverty, 
but broadens the scope of protection to include pre¬ 
scription drugs and offer assistance to the near-poor 
population. The administrative structure for eligibility 
determination and payment of premiums and cost¬ 
sharing is already in place in most states and can be 
used as the foundation for expanded coverage. With 
buy-in coverage plus prescription drug coverage, 
Medicaid will provide substantial relief from the pre¬ 
miums and out-of-pocket financial burdens now faced 
by low-income Medicare beneficiaries. In addition, 
states should also be encouraged to expand coverage 
to other services generally provided by Medicaid, 
such as dental care and vision and hearing services, 


144 




























by making federal matching funds available to states 
that elect to offer more comprehensive coverage. 

Expanding Medicaid assistance for the low-income 
elderly population is an incremental reform that 
would provide immediate relief from medical burdens 
to the most vulnerable of the elderly population. Ex¬ 
tension of Medicaid’s safety net is essential to assure 
needed medical services will no longer impose an un- 

References 


Christensen, Sandra. 1989. “Estimates for Aged Medicare Enrollees, 1989.” 
CBO Staff Memorandum. 

Christensen, Sandra, and Richard Kasten. 1988. “Covering Catastrophic 
Expenses under Medicare.” Health Affairs. Vol. 7, No. 1 (Winter), pp. 80-93. 

Christensen, Sandra, Stephen Long and Jack Rodgers. 1987. “Acute 
Health Care Costs for the Aged Medicare Population: Overview and Policy 
Options.” The Milbank Quarterly. Vol. 65, No. 3, pp. 397-425. 

Commonwealth Fund Commission on Elderly People Living Alone. 1987. 
Medicare's Poor: Filling the Gaps in Medical Coverage for Low-Income Elderly 
People. Report prepared by Diane Rowland and Barbara Lyons. Baltimore, 
Maryland. 

Consumer’s Union. 1989. “Beyond Medicare” Consumer Reports (June), pp. 
375-391. 

Feder, Judith, Marilyn Moon and William Scanlon. 1987a “Medicare 
Reform: Nibbling at Catastrophic Costs.” Health Affairs. Vol. 6, No. 4 
(Winter), pp. 5-19. 

Feder, Judith, Marilyn Moon and William Scanlon. 1987b. “Catastrophic 
Health Insurance for the Elderly: Options and Impacts.” Working Paper. 
Washington, D.C. 

Georgetown Policy Associates. 1987. “Health Spending and Poverty 
Status Among the Elderly.” Final Report submitted to The Commonwealth 
Fund Commission on Elderly People Living Alone. Baltimore, Maryland. 

Kennell, David. 1990. Unpublished Statistics from the Survey of Income 
and Program Participation. Lewin/ICF, Inc. Washington, D.C. 

Kovar, Mary Grace. 1986. “Expenditures for the Medical Care of Elderly 
People Living in the Community.” The Milbank Quarterly. Vol. 64, No. 1, 
pp. 100-132. 

M annin g, W.G., J.P. Newhouse, and J.E. Ware. 1981. “The Status of 
Health in Demand Estimates: Beyond Excellent, Good, Fair, and Poor." In 


manageable fmancial burden for poor and near-poor 
elderly Medicare beneficiaries. Future initiatives may 
look to broadening the scope of Medicare coverage 
for all elderly people, but in the short run Medicaid 
reforms directed toward the low-income population 
can make a measurable difference in improving access 
to care and alleviating the fmancial burdens associated 
with medical care services. 


Economic Aspects of Health. Ed. V.R. Fuchs. Chicago University. Chicago, 
Illinois. 

Mathiowetz, Nancy. 1989. Unpublished statistics from analysis of the Na¬ 
tional Medical Expenditure Survey. Agency for Health Care Policy and Re¬ 
search. Rockville, Maryland. 

Moeller, John, and Nancy Mathiowetz. 1989. Prescribed Medicines. A Sum¬ 
mary of Use and Expenditures by Medicare Beneficiaries. DHHS Pub. No. 
(PHS)89-3448. National Medical Expenditure Survey Research Findings 3, 
National Center for Health Services Research and Health Care Technology 
Assessment. Rockville, Maryland. 

Monheit, Alan and Claudia Schur. 1989. Health Insurance Coverage of Re¬ 
tired Persons. DHHS Pub. No. (PHS) 89-34411. National Medical Expendi¬ 
ture Survey Research Findings 2, National Center for Health Services Re¬ 
search and Health Care Technology Assessment. Rockville, Maryland. 

Rice, Thomas and Nelda McCall. 1985. “The Extent of Ownership and the 
Characteristics of Medicare Supplemental Policies.” Inquiry. Vol. 22, pp. 
188-200. 

Rowland, Diane. 1989. “Measuring the Need for Home Care.” Health Af¬ 
fairs. Vol. 8, No. 4, pp. 39-51. 

Rowland, Diane, Alina Salganicoff, and Barbara Lyons. 1989. “The Medi¬ 
care Buy-In: Variations in State Medicaid Policy.” Report prepared for the 
Families U.S.A. Foundation and the Pepper Bipartisan Commission on Com¬ 
prehensive Health Care. November. 

U.S. Congress, House of Respresentatives, Committee on Ways and Means. 
1989. Background Material and Data on Programs within the Jurisdiction of the 
Committee on Ways and Means. WMCP:101-4. Washington, D.C.: U.S. GPO. 

U.S. Congressional Budget Office. 1989. Updated Estimates of Medicare's 
Catastrophic Drug Insurance Program. October. 

U.S. Congressional Budget Office. 1990. Unpublished estimates prepared 
by Jack Rodgers based on analysis of the Current Population survey, March 
1989. 


145 



































Long-Term Care 







CASE MANAGEMENT IN LONG-TERM CARE * 


INTRODUCTION 

Case management is used in many different settings 
and for a variety of purposes. As a result, the term 
case management means different things to different 
people. Researchers, health care and social service 
professionals, policy analysts, and others who talk 
about case management may or may not be talking 
about the same thing. 

In developing a national long-term care program, it 
is important to be as clear as possible about what case 
management is expected to do and how it should 
operate in the program, because some of the most sig¬ 
nificant outcomes of the program are likely to be 
determined within the case management process. As 
discussed in this paper, case management is likely to 
be the mechanism by which decisions are made about 
the amount and kind of services people will receive 
through the program. In turn, those decisions will de¬ 
termine the cost of the program, how people perceive 
it, and whether it meets their needs. 

This OTA staff paper proposes a definition of case 
management and points out several conceptual dis¬ 
tinctions that are important in thinking about the case 
management component of a national long-term care 
program. The paper discusses whether case managers 
should determine the amount and kind of services 
people are authorized to receive through the program 
and whether the case management component of the 
program should be split between two agencies. The 
paper also reviews some findings of OTA’s forth¬ 
coming report, Confused Minds, Burdened Families: 
Finding Help for People With Alzheimer's and Other 
Dementias, that relate to questions about the agencies 
that might provide case management in a national 
long-term care program and the appropriate role of 
the program and the case managers who implement it 
with respect to the quality of the long-term care serv¬ 
ices that are provided or paid for by the program. 

• This staff paper was prepared for the U.S. Bipartisan Commission on 
Comprehensive Health Care (The Pepper Commission), by the Office of 
Technology Assessment, Biological Applications Program, February 5, 1990. 

The views expressed in this staff paper do not represent the views of the 
Technology Assessment Board, the Technology Assessment Advisory Coun¬ 
cil or individual members thereof. 


Much valuable information about case management 
in long-term care programs is available from several 
sources. Case management has been a component of 
virtually all the long-term care research and demon¬ 
stration projects that have been conducted in the 
United States since the mid-1970s, including the Na¬ 
tional Long-Term Care Channeling Demonstration 
project (25,40,47,55). Case management is a central 
component of many State long-term care programs, 
including State programs that are funded in whole or 
in part through Medicaid 2176 Home and Commu¬ 
nity-based Waivers (34,35). Case management is also a 
central component of the Social/Health Maintenance 
Organization (S/HMO) demonstration program (3,42). 
All of these programs allocate long-term care services 
and/or funding for such services. Research findings 
and practical knowledge derived from these programs 
are relevant to many of the difficult issues that must 
be resolved in designing the case management compo¬ 
nent of a national long-term care program. For the 
purpose of designing that component of the program, 
the research findings and practical knowledge de¬ 
rived from these programs are probably more helpful 
than theoretical discussions about case management or 
information about the role and operation of case man¬ 
agement in other programs that do not allocate long¬ 
term care services or funding for services. It is likely 
that some of the case management policies and pro¬ 
cedures developed by the former programs could be 
adopted directly by a national long-term care 
program. 


WHAT IS CASE MANAGEMENT 

As noted above, case management means different 
things to different people. In the context of long-term 
care for elderly and disabled people, OTA defines 
case management as a process that includes five func¬ 
tions (67): 

• assessing a client’s needs, 

• developing a plan of care for the client, 

• arranging and coordinating the needed services, 


149 



• monitoring and evaluating the services the client 
receives, and 

• reassessing the client’s situation as the need arises. 

Most commentators agree that case management 
in long-term care includes these five functions 
(6,13,18,24,25,31,36,39,43,51,52,61,63,71,72), but there 
are still many unresolved definitional issues with re¬ 
spect to case management. First, some commentators 
include other functions—notably, case finding, screen¬ 
ing, client education, and counseling—in their 
definitions of case management. Second, the imple¬ 
mentation of each of the case management functions 
varies, depending on factors such as the type of the 
agency that provides it, the objectives and other func¬ 
tions of that agency, whether the agency provides 
services in addition to case management, the goals, 
educational background, experience, and training of 
the case manager, and the number of clients the case 
manager has. The same factors also influence the rela¬ 
tive amount of emphasis the case manager and the 
agency place on each of the case management 
functions. 1 

Many conceptual distinctions have been proposed 
to categorize the differences in the role and practice 
of case management in different agencies and settings 
(see, for example, Austin, et al., 1985 (16); Capitman, 
et al., 1986 (25); Kane, et al, 1989 (39); and Weil, 1985 
(71). Two conceptual distinctions are particularly im¬ 
portant in thinking about the case management com¬ 
ponent of a national long-term care program. The first 
of these is a conceptual distinction between case man¬ 
agement as an administrative process and case manage¬ 
ment as a clinical or helping process. In many agencies 
that allocate long-term care services or funding for 
long-term care services, case managers perform cer¬ 
tain tasks that are essential for the administration of 
those benefits in accordance with agency or program 
regulations. These administrative tasks include deter¬ 
mining people’s eligibility for the benefits, authorizing 
the benefits, and monitoring and accounting for their 
use. When case managers are responsible for these 
administrative tasks, the case management functions 
mentioned earlier are modified to include the tasks. 
For example, the function of arranging and coordi¬ 
nating services is modified to include administrative 
procedures for authorizing services and funding for 
services. The functions of monitoring the services and 
of reevaluating the client’s needs are modified to in¬ 
clude procedures to account for the services and 


1 In this paper, the term “case manager” is used to refer to an individual 
who performs the case management functions listed above. As is true of case 
management, however, the term “case manager” means different things to 
different people, and in reality, some individuals who perform these case 
management functions are not called “case managers” and other individuals 
who are called “case managers” do not perform the functions. 


funds that are used and to recertify the client’s eligi¬ 
bility for services. 

In some agencies that allocate long-term care serv¬ 
ices and funding for services, case management is 
primarily a series of administrative tasks intended to 
allocate benefits in accordance with agency or pro¬ 
gram regulations. In other agencies, case management 
is primarily a clinical or helping process in which the 
case manager functions more as a professional helper, 
counselor, and client advocate than as an administra¬ 
tor of benefits. Clinical case management responds to 
a variety of difficult problems that confront people 
who need long-term care. One of those problems is 
that the long-term care service environment is ex¬ 
tremely complex and fragmented in many communi¬ 
ties, so that some people who need long-term care 
require assistance to locate and arrange services. A 
second problem is that some people who need long¬ 
term care have multiple service needs, so that they 
may require assistance in coordinating the services of 
several different providers. Lastly, some people who 
need long-term care require assistance in defining the 
problems they are facing, determining what kind of 
services might be helpful, and mobilizing informal 
(unpaid) sources of help (relatives, neighbors, friends, 
church groups, etc.). As professional helpers, coun¬ 
selors, and client advocates, case managers provide all 
these kinds of assistance. 

If it were possible to make a clear distinction in re¬ 
ality between case management as an administrative 
process and case management as a clinical or helping 
process and call one case management and the other 
something else, it would be easier for everyone to 
understand and communicate clearly about case man¬ 
agement and its role and operation in a national long¬ 
term care program. That distinction cannot be applied 
precisely in reality, however. As practiced in many 
agencies, case management includes both administra¬ 
tive and clinical tasks, and many case managers who 
administer long-term care benefits for their agencies 
perceive themselves as professional helpers, coun¬ 
selors, and advocates. 2 Moreover, OTA is not aware 
of any research that shows that as a group these case 
managers perform the clinical case management tasks 
differently than case managers who do not administer 
benefits. 


2 In a study by the University of Washington, 127 case managers in agen¬ 
cies that allocate services and funding for services in Oregon and Washington 
State were asked to rate the importance of 11 possible goals of case manage¬ 
ment (15). All these case managers’ jobs involved administrative tasks related 
to allocating services and funding for services, but the goals they identified as 
most important had to do with helping and advocacy. In the view of these 
case managers, at least, the administrative and clinical aspects of case man¬ 
agement are intertwined. 


150 




Even though the conceptual distinction between 
case management as an administrative process and 
case management as a clinical or helping process 
cannot be applied precisely in reality, it is useful in 
thinking about the role and operation of case manage¬ 
ment in a long-term care program because it underlies 
one of the primary areas of disagreement about case 
management in such program. It is in the context of 
performing administrative tasks related to the alloca¬ 
tion of program benefits that case managers become 
the “gatekeepers” in a long-term care program, and it 
is in that context that they are likely to be perceived 
as restricting clients’ access to needed services. Some 
people argue that case management as an administra¬ 
tive “gatekeeping” process is not compatible with 
case management as a clinical or helping process and 
that the “gatekeeping” and clinical case management 
tasks should be performed by different agencies or 
different units of the same agency. Other people argue 
that the two types of tasks can be effectively per¬ 
formed by the same agency or unit. This issue is dis¬ 
cussed further in a later section of this paper. OTA’s 
perception is that both the administrative and clinical 
tasks are performed by the same case manager in most 
long-term care programs that allocate services or 
funding for services—at least after an initial determi¬ 
nation has been made that an individual is eligible for 
the program. 

The second important conceptual distinction in 
thinking about the case management component of a 
national long-term care program is the distinction be¬ 
tween a case management process that is “ service-cen¬ 
tered ” vs. one that is “comprehensive. ” Service-centered 
case management is case management that is provided 
in conjunction with the provision of a particular serv¬ 
ice (e.g., homemaker or home health aide services). 
Comprehensive case management takes place independ¬ 
ent of the provision of any particular service (46). 

The distinction between service-centered and com¬ 
prehensive case management is important because it 
underlies two other areas of disagreement about case 
management in a long-term care program. Many 
agencies and individuals that provide services also 
“case manage” their clients. One area of disagreement 
is whether a long-term care program should provide 
case management for people who are receiving case 
management from a service provider in conjunction 
with a particular service (i.e. service-centered case 
management). The more widely debated issue is 
whether service providers should be the case man¬ 
agers for a long-term care program. Both issues are 
discussed later in this paper. 

Some commentators make a distinction between 
case management and “care management,” “care co¬ 


ordination,” “service coordination,” or similar terms. 
Although these distinctions may be meaningful within 
the conceptual framework developed by a given com¬ 
mentator, the terms are not used in a consistent way 
by different commentators. Thus, the use of these 
terms does not facilitate clear communication about 
case management, and OTA does not consider the 
terms helpful in thinking about the case management 
component of a long-term care program. 

Should Case Managers Determine the 
Amount and Kind of Services 
People Receive Through a National 
Long-Term Care Program? 

Case managers determine the amount and kind of 
services people receive in virtually all existing long¬ 
term care programs that allocate services or funding 
for services. In many of these programs, there are at 
least two steps that take place before the amount and 
kind of services a person will receive are determined. 
First, the person’s eligibility for the program is deter¬ 
mined. Eligibility is usually determined on the basis of 
only a few factors and may or may not be determined 
by a case manager. 3 Once the person is found to be 
eligible for the program, he or she usually receives an 
assessment by a case manager. Based on the results of 
the assessment, the case manager then develops a plan 
of care which includes a determination of the amount 
and type of services that will be authorized for the 
person. The assessment usually addresses many more 
factors than are considered in the eligibility determi¬ 
nation. Factors such as the person’s mental, and emo¬ 
tional status, the person’s living arrangements and 
physical and social environment, and the availability 
of help from informal (unpaid) caregivers are fre¬ 
quently included in the assessment. All of these fac¬ 
tors are relevant to determining the amount and kind 
of services a person needs but not necessarily relevant 
to determining eligibility for the program. 

In many long-term care programs, the assessment is 
based on a formal assessment instrument—i.e. an inter¬ 
view schedule that addresses all or many of the fac¬ 
tors just noted. If there were an assessment instrument 
that could accurately determine the amount and kind 
of services a person needs without requiring the judg¬ 
ment of a case manager, that instrument could be used 
to determine what services the long-term care pro¬ 
gram should provide for the person. Sometimes de¬ 
scriptions of client assessment and care planning in 


3 Existing long-term care programs generally base eligibility for program 
benefits on categorical criteria (age, disability, etc.), medical and functional 
status, financial need, and/or the person’s need for nursing home care, as de¬ 
fined by the State’s Medicaid program regulations. 


151 



long-term care programs sound as if there are such in¬ 
struments and as if the determination of the amount 
and kinds of services authorized for clients of the pro¬ 
gram comes directly from the assessment instrument. 
At present, however, there is no assessment instru¬ 
ment that has been shown to identify the amount or 
kind of services that people need. In fact, research in¬ 
dicates that even in long-term care programs in which 
there are standardized assessment procedures that in¬ 
clude the use of an assessment instrument and the case 
managers are trained to follow the procedures pre¬ 
cisely, clients who are the same in terms of the factors 
addressed by the assessment are perceived by dif¬ 
ferent case managers as having different needs, and 
the amount and kind of services authorized for them 
by different case managers vary (1,25,58). 

Some efforts are underway to standardize care 
planning, so that the same amount and kind of serv¬ 
ices will be authorized by case managers for people 
whose assessments are the same (1,58). These efforts 
are not complete, however, and it is not clear how 
soon such a “case-mix” approach to long-term care 
planning might be ready for use in a national long¬ 
term care program. Nor is it clear that determinations 
of the amount and kinds of services to be authorized 
for clients of a long-term care program should rely 
solely on an assessment instrument without requiring 
the judgment of a case manager. It is clear, as men¬ 
tioned earlier, that there is currently no assessment in¬ 
strument that has been shown to identify the amount 
or kind of long-term care services that people need. 

Aside from having a case manager determine the 
amount and kind of services to be authorized for cli¬ 
ents of a long-term care program, the only other 
alternative would be to allow people who are eligible 
for the program to decide what services they need 
(with or without the advice of a physician, other 
health care or social service professional, or anyone 
else) and then to set up a procedure by which the 
program would review and authorize or decline to 
authorize reimbursement for the services retrospec¬ 
tively. If this approach were implemented, people 
who were eligible for the program would use long¬ 
term care services and then they or the service pro¬ 
vider would submit a claim for reimbursement, in 
much the same way that claims are submitted for 
Medicare reimbursement for home health care serv¬ 
ices. OTA is not aware of any long-term care pro¬ 
gram that operates in this way. 

The main points here are: 1) that the determination 
of the amount and kind of services to be authorized 
for a person through a long-term care program is dif¬ 
ferent from the determination that the person meets 
the eligibility requirements for the program, and 2) 


that there appears to be no viable alternative to 
having a case manager determine the amount and 
kind of services to be authorized for people through a 
national long-term care program. 4 These points raise 
certain problems for such a program. The first prob¬ 
lem is the predictably negative response of people 
who are found to be eligible for the program and then 
discover that, in fact, a case manager will determine 
the amount and type of services they will be author¬ 
ized to receive through the program. This problem is 
likely to be particularly acute if the long-term care 
program is an entitlement program. 

Another problem is that the administrative 
“gatekeeping” tasks in case management clearly arise 
in the context of assessment and care planning, not 
just eligibility determination. Therefore, if policy 
makers want to separate the administrative “gate- 
keeping” tasks from the clinical tasks in the case man¬ 
agement component of the long-term care program in 
order to address the alleged incompatibility of the 
two types of tasks, it will be necessary to place the 
responsibility for assessment and care planning in one 
agency or unit of an agency and the responsibility for 
the clinical case management tasks in another agency 
or another unit of the same agency. 

Some recent proposals for a national long-term care 
program place the responsibility for determining eligi¬ 
bility in one agency or one unit of an agency and the 
responsibility for assessment, care planning, and other 
case management functions in another agency or an¬ 
other unit of the same agency. The rationale that is 
sometimes given for this approach is to separate the 
“gatekeeping” and clinical case management tasks. 
Clearly, this rationale is based on a misunderstanding 
of the process by which decisions are made about the 
amount and kind of services that will be authorized 
through the program. 

Another possible approach is to place the responsi¬ 
bility for eligibility determination, assessment, and 
care planning in one agency or one unit of an agency 
and the responsibility for clinical case management 
tasks in another agency or unit. Since people’s service 
needs change over time, assessment and care planning 
must be ongoing. If this second approach were imple¬ 
mented, each client would have to have two case 
managers, one to administer the program benefits and 
one to perform clinical case management tasks. Al¬ 
though this approach might create an adversarial rela¬ 
tionship between the two case managers, some people 

4 Although there appears to be no viable alternative to having a case man¬ 
ager determine the amount and kind of services to be authorized for people 
through a long-term care program, many structural and operational aspects 
of the program will affect how the case manager performs this function. 
Some of these structural and operational aspects are discussed later in this 
paper. 


152 



believe that it is the only way to guarantee that cli¬ 
ents of a long-term care system have an advocate in 
the program. The approach would be likely to be du¬ 
plicative and therefore expensive. 

A third possible approach is to have the original 
determination of eligibility, the initial assessment, and 
the initial care plan done by one agency or unit of an 
agency and then to have ongoing case management 
provided by another agency or unit of an agency. 
This approach does not effectively separate the “gate¬ 
keeper” and clinical case management tasks, because 
the ongoing case management would still include both 
“gatekeeper” tasks (i.e., reassessments and redeter¬ 
minations of the amount and kind of services to be au¬ 
thorized for a client) and clinical case management 
tasks. 

The fourth possible approach, and the one that is in 
effect in most existing programs that allocate long¬ 
term care services and/or funding for services, is to 
assign responsibility for both ongoing administrative 
case management tasks and clinical case management 
tasks to the same agency and case manager. This is 
the approach that raises concerns about the incom¬ 
patibility of administrative “gatekeeping” tasks and 
clinical tasks. If this approach were adopted for a na¬ 
tional long-term care program, safeguards would have 
to be built into the program to try to ensure that case 
managers’ determinations of the amount and kind of 
services to be authorized for clients would be fair and 
that case managers would perform clinical tasks for 
their clients to the greatest extent possible. Such safe¬ 
guards could include training for case managers about 
how to balance the conflicting demands of the “gate¬ 
keeper” and clinical/advocacy roles, the provision of 
forums for consultation and supervision for case man¬ 
agers who confront difficult decisions about the 
amount and kind of services to be authorized for a 
client, and an effective appeals process. Some people 
would argue that these safeguards are not adequate to 
ensure that people have an advocate in the program. 

Each of the 4 approaches discussed above has 
drawbacks. The important point is that there is no 
simple way to separate the “gatekeeping” and clinical 
case management tasks and that placing the responsi¬ 
bility for these tasks in different agencies or different 
units of the same agency may create more problems 
than it solves with respect to balancing the adminis¬ 
trative “gatekeeping” tasks and the clinical tasks of 
case management. 5 

* A different reason for placing various case management functions in 
more than one agency is to create an oversight mechanism by which one 
agency would review decisions about services made by the other agency 
Policy makers might decide that such an oversight mechanism is necessary if, 
for example, the Federal government were paying for long-term care services 
that were being authorized by State-administered agencies, and the Federal 


Who Should Receive Case Management in a 
Long-Term Care Program? 

As discussed in the previous section, decisions 
about the amount and kind of services people receive 
through a long-term care program probably must be 
made by case managers. Thus everyone who receives 
services through the program must receive case man¬ 
agement in the sense of the administrative tasks that 
are essential to allocate services and funding for serv¬ 
ices in accordance with program regulations. 

Whether everyone who receives services through 
the program should receive case management beyond 
those essential administrative tasks is another question. 
As discussed earlier, at least some people who need 
long-term care services also require assistance with 
defining their service needs, locating and arranging 
services, and coordinating the services of multiple 
providers. Anecdotal evidence suggests that many 
people who need long-term care require these kinds 
of assistance. 

The findings of an exploratory study conducted for 
OTA in Pennsylvania and of market surveys con¬ 
ducted for the Robert Wood Johnson Foundation’s 
Supportive Services Program for Older Persons indi¬ 
cate, however, that some people do not want case 
management. The study conducted for OTA involved 
interviews with 46 family caregivers of people with 
dementia (73). Some of the caregivers did not want 
and did not think they needed case management. One- 
fourth of the caregivers said they would rather ar¬ 
range services themselves than have a case manager 
act as an intermediary. The caregivers’ major concern 
about case management was control: they wanted to 
retain control over the kinds of services to be pro¬ 
vided for their relative with dementia and over who 
would provide the services. 

The findings of market surveys conducted for the 
Robert Wood Johnson Foundation’s Supportive Serv¬ 
ices Program for Older Persons also suggest that 
many older people and their families do not want case 
management and that they do not understand why 
they might need it (33). Older people and their fami¬ 
lies who responded to the market surveys indicated 
that they did not see themselves as “cases” to be man¬ 
aged and that they did not understand why they 
would need a special person or a special set of func¬ 
tions in order to obtain services. Many of them ex¬ 
pressed confidence in their ability to define their own 


government wanted to review the service allocation decisions made by the 
State-administered agencies. Creating such an oversight mechanism would 
not necessarily resolve concerns about the incompatibility of “gatekeeping” 
and advocacy-related tasks in case management, however. In fact, these con¬ 
cerns would be relevant to decisions made by both agencies. 


153 




service needs and did not think they would need a 
case manager to help with that (21). Ninety-five 
percent of the older people and 86 percent of 
the caregivers said they had no need for care 
planning (23). 

These findings do not prove that the people who 
were interviewed do not need case management or 
would not need it at some time in the future. The 
findings only suggest that some people do not want 
case management. Policy makers could conclude that 
a case management process which is uniform for 
everyone is, in effect, the price of receiving services 
through a national long-term care program, and they 
might assume that people will be willing to accept 
case management to get the services—probably a rea¬ 
sonable assumption in general. On the other hand, 
case management is an expensive addition to the cost 
of long-term care services. 6 Policy makers might 
prefer to limit the case management that is required 
for everyone who receives services through a national 
long-term care program to only those administrative 
tasks that are essential to allocate services in accord¬ 
ance with program regulations. Case management 
beyond those administrative tasks might be provided 
only for people who are identified as needing it by 
some specified criteria. 

Many commentators have noted that families of 
frail older people frequently perform case man¬ 
agement tasks, acting as intermediaries between the 
older person and paid service providers 
(20,22,24,44,45,59,64). Some commentators have sug¬ 
gested that maximizing families’ performance of case 
management tasks might increase the family’s satisfac¬ 
tion with services, meet patients’ needs more appro¬ 
priately, minimize costs, and eventually decrease the 
need for a paid case manager (31,59,60,62). Few at¬ 
tempts have been made to help families become better 
case managers (27) but one project that did train and 
assist some families of elderly people to perform case 
management tasks found that the families who re¬ 
ceived the training and assistance accomplished sig¬ 
nificantly more case management tasks than did a 
control group of families that did not receive the 
training and assistance. Additionally, the total dura¬ 
tion of services was significantly shorter for the older 
people whose families received the training and as¬ 
sistance than for older people whose families did 
not (59). 


6 Capitman, et al. (1986) reported average case management costs ranging 
from $47 to $134 per client per month for 5 long-term care demonstration 
programs (25). The average cost of case management for the National Long- 
Term Care Channeling Demonstration was $85 per client per month (46). 
Kane et al. (1989) reported case management costs ranging from $96 to $123 
per client per month in 44 long-term care programs, including both oper¬ 
ational and demonstration programs (39). 


A national long-term care program could attempt 
to maximize families’ performance of case manage¬ 
ment tasks. Doing so would alleviate the concerns of 
some families that the case manager will take over 
control of their relative’s care. Families differ, of 
course, and whether a specific family is able to per¬ 
form case management tasks depends on the charac¬ 
teristics of the family and the caregiving situation. 
Determining which families could successfully per¬ 
form case management tasks (with or without training 
and assistance) would require difficult judgments by 
case managers in at least some instances. To make 
these judgments and to help families become better 
case managers would require special skills on the part 
of the case managers. 

Some individuals who need long-term care services 
also may be able to function as their own case man¬ 
ager. OTA’s work with respect to long-term care 
services and service delivery mechanisms has focused 
primarily on people with dementia, the great majority 
of whom are not able to function as their own case 
manager, that is, they cannot define their service 
needs, locate or arrange services themselves, or moni¬ 
tor or evaluate the services, etc. (67). Some elderly 
people and disabled people who need long-term care 
and do not have dementia may be able to perform 
some or all of these tasks themselves. 

If the objectives of a national long-term care pro¬ 
gram were to include maximizing families’ and indi¬ 
viduals’ performance of case management tasks 
(except for the administrative tasks involved in allo¬ 
cating services in accordance with program regula¬ 
tions), several requirements would have to be met. 
First, there would have to be a clear mandate that 
this was an objective of the program. Second, there 
would have to be guidelines for implementing the ob¬ 
jective, and third, there would have to be training for 
case managers to help them achieve the objective. 

A final issue related to the question of who should 
receive case management in a national long-term care 
program is whether the program should provide case 
management for people who are not eligible for the 
services (nursing home care, in-home services, adult 
day care, etc.) provided by the program. Recent pro¬ 
posals for a national long-term care program would 
provide case management only for people who meet 
the eligibility requirements for the program (i.e., 2 or 
3 ADLs, or a combination of ADLs, IADLs, and 
cognitive impairment). Some State long-term care 
programs that are means-tested provide case manage¬ 
ment for people who do not meet the financial eligi¬ 
bility criteria for the programs (35), and several States 
provide case management for some people with de¬ 
mentia who do not meet the functional eligibility re- 


154 



quirements for the States’ long-term care program 
(67). OTA’s study of methods of linking people with 
dementia to appropriate services indicates that some 
people with dementia who do not meet the proposed 
eligibility criteria for a national long-term care pro¬ 
gram nevertheless need case management (67). The 
same is undoubtedly true for some elderly and dis¬ 
abled people who do not have dementia. 

If a national long-term care program provided case 
management for certain people who were not eligible 
for services through the program, it would increase 
the cost of the program. On the other hand, providing 
case management for those people would help to con¬ 
nect them to appropriate services and perhaps would 
make the national program more acceptable to in¬ 
dividuals who need long-term care services but are 
not impaired enough to receive services through the 
program. 

What Agencies Should Provide Case 
Management in a National 
Long-Term Care Program? 

In its study of methods of linking people with de¬ 
mentia to services (67), OTA analyzed many agencies’ 
current and potential capacity to provide case man¬ 
agement and three other linking functions—public 
education, information and referral and outreach—for 
people with dementia. OTA analyzed some State 
programs that provide case management for elderly 
and/or disabled people, as well as 11 categories of 
agencies that could conceivably be designated from 
the Federal level to provide case management for 
people with dementia. 7 Although the focus of the 
OTA report is not the allocation of long-term care 
services or funding for services, the following findings 
of the OTA study may be helpful in thinking about 
what agencies should be designated to provide case 
management for a national long-term care program. 

• Case management differs greatly from one 
agency to another and from one category of 
agencies to another. Even in agencies that 
purport to provide the five case management 
functions listed earlier in this paper, the case 
management that is provided varies greatly. 
Therefore, the fact that an agency or a category 
of agencies provides “case management” is not 

7 The 11 categories of agencies included in OTA s analysis of agencies that 
could be designated from the Federal level to provide case management and 
other li nkin g functions for people with dementia are: area agencies on aging, 
community mental health centers, community health centers, Alzheimer s 
Association chapters, replications of Family Survival Project, regional Alz¬ 
heimer's diagnostic and assessment centers, hospital-based geriatric assess¬ 
ment programs, home health agencies, health maintenance organizations 
(HMOs) and SHMOs, replications of On Lok, and adult day centers. 


an indication that the agency or category of 
agencies is capable of providing the case manage¬ 
ment that will be needed in a national long-term 
care program. 

• A very large number of agencies and categories 
of agencies provide or perceive themselves as 
providing case management for people who need 
long-term care. There are intense turf issues 
among these agencies that emerge whenever a 
suggestion is made that one agency or one cate¬ 
gory of agencies should be the case manager. 
These turf issues reflect the agencies’ perception 
that the agency that is designated as the case 
manager will control what services are used and 
who gets paid for providing them. 

• Some States have developed consolidated long¬ 
term care service programs in which case man¬ 
agement is a central component. These States 
have designated a single agency in each locality 
as the case management agency. In some of the 
States, the agency designated to provide case 
management at the local level has been changed 
one or more times after the State program was 
instituted. In designating local case management 
agencies, the States have confronted intense turf 
issues, and resolving the turf issues has required 
time and, in some cases, certain concessions to 
agencies or categories of agencies that were not 
selected as the case management agency. 

• Even in States that have not developed consoli¬ 
dated long-term care service programs, there are 
State and local government agencies and private 
agencies that provide case management for State 
programs. These agencies vary greatly from one 
State to another. 

Some conclusions that can be drawn from these 
findings are that a policy decision about which agen¬ 
cies will provide case management for a national 
long-term care program will engender intense turf 
issues; that the agencies that are best-qualified to pro¬ 
vide case management for a national long-term care 
program differ from one State to another; and that 
designating a single category of agencies to provide 
case management nationwide would require States to 
change their current case management programs and 
would confound the ongoing efforts of some States to 
develop and maintain consolidated long-term care 
programs. All of these conclusions point to the 
wisdom of allowing each State to designate the agen¬ 
cies that will provide case management for the na¬ 
tional long-term care program as it is implemented in 
that State. 

One of the most controversial issues with respect to 
determining which agencies should provide case man- 


155 


28-861 - 90 - 6 : QL 3 



agement for a national long-term care program is 
whether agencies that provide services other than 
case management (home health care, senior services, 
etc.) should be excluded from consideration. This 
issue is more complex than one might assume from 
the policy debate at the Federal level, which gener¬ 
ally concludes that agencies that provide services 
should be excluded from consideration because these 
agencies have a financial incentive to refer clients to 
their own services rather than to the services of other 
agencies and to authorize too many services for cli¬ 
ents. Only a few of the complex aspects of this issue 
are noted here. A full analysis of the issue is needed. 

First, as noted earlier, some agencies provide serv¬ 
ice-centered case management (i.e., case management 
that is provided in conjunction with the provision of a 
particular service) and other agencies provide com¬ 
prehensive case management (i.e. case management 
that takes place independent of the provision of any 
particular service). Clearly, a national long-term care 
program would require comprehensive as opposed to 
service-centered case management. That does not 
mean, however, that agencies that provide services, 
such as home health care agencies and mental health 
agencies, could not provide case management for the 
program. That agencies which provide services can 
also provide comprehensive case management is illus¬ 
trated by the home health care and mental health 
agencies that provided comprehensive case manage¬ 
ment for the National Long-Term Care Channeling 
Demonstration (46) and by the home health care, 
mental health, and senior service agencies that pro¬ 
vide comprehensive case management for Illinois’ 
Community Care Program (35). 

The experience of the National Long-Term Care 
Channeling Demonstration indicates that case man¬ 
agers in agencies that provide services can be effec¬ 
tively insulated from pressures to refer clients to their 
own agencies’ services, rather than to other agencies’ 
services that may be more appropriate for the client, 
and pressures to over-prescribe services (14). On the 
other hand, in Illinois, the agencies that provide case 
management for the State’s Community Care Pro¬ 
gram are prohibited from providing other services 
through the program. An analysis of practices in ex¬ 
isting programs that allocate long-term care services 
or funding for services with respect to this issue 
would be helpful in deciding whether agencies that 
provide services should provide case management for 
a national long-term care program. 

A related question is whether or to what extent the 
long-term care program should provide case manage¬ 
ment for people who are receiving case management 
from another agency in conjunction with services 


they get from that agency. OTA has become aware 
of this question through conversations with several 
staff members of agencies in Cleveland, Ohio, where 
the State is implementing PASSPORT, a compre¬ 
hensive long-term care program that has been in 
effect in other parts of the State for several years. 
PASSPORT’S case management procedures are 
central to the administration of the program. On the 
other hand, some agency staff members in Cleveland 
believe that, in general, people who are eligible for 
PASSPORT should receive case management from 
the agencies that provide services for them, and that 
providing case management through PASSPORT 
would duplicate the efforts of those agencies. 

This is a question that can be expected to arise re¬ 
peatedly in the implementation of a national long-term 
care program. It is unclear how it should be resolved. 
An analysis of the ways in which it is handled in ex¬ 
isting agencies that allocate long-term care services or 
funding for services is needed to inform Federal 
policy decisions in this area. 

Within The Agencies That Provide 
Case Management for a National 
Long-Term Care Program, Who Should 
Be the Case Managers 

Virtually all health care, social service, and other 
human service professionals and service providers 
“manage” their clients in some sense. Nurses and 
social workers are the case managers in some agencies 
that allocate long-term care services or funding for 
services. Other such agencies employ as case man¬ 
agers individuals with a college, but not a professional 
degree in a human service field (15). 

Differences of opinion about who should be the 
case manager usually focus on social workers vs. 
nurses and involve competing claims about the knowl¬ 
edge and skills that case managers need and which 
group has that knowledge and those skills 
(7,9,14,28,30,36,49,53). Those differences of opinion 
often reflect intense turf conflicts. In many agencies, 
however, social workers and nurses work together 
constructively and comfortably, learning from each 
other and relying on each other’s unique knowledge 
and skills. Many commentators, including some of 
those who have noted the turf issues between social 
workers and nurses, have concluded that both are 
needed for effective case management (7,9,41,56). 
That seems to be a wise conclusion. 

Some commentators have emphasized that regard¬ 
less of their education and training, case managers 


156 


who work for programs that allocate long-term care 
services or funding for services need tr ain ing to 
follow standardized assessment and care planning pro¬ 
cedures and to include cost consciousness in the fac¬ 
tors they consider in authorizing services for clients 
of the program (1,2,9,34,37,39,58). This report has 
suggested several other areas in which special train¬ 
ing might be needed for case managers—for exam¬ 
ple, in balancing the conflicting demands of the 
“gatekeeping” and clinical/helping roles, in determin¬ 
ing which clients of a long-term care program need 
case management beyond the administrative tasks that 
are essential to allocate benefits, and in helping fami¬ 
lies become better case managers. 


CASE MANAGEMENT STANDARDS 

The American Nurses’ Association, the National 
Association of Social Workers, the National Council 
on the Aging, and Ohio’s PASSPORT program, and 
perhaps other organizations have formulated case 
management or “care management” standards 
(6,10,51,52). OTA has not compared those standards 
systematically, but a brief review indicates that they 
are based on similar views about the role and practice 
of case management. Policy makers might consider in¬ 
corporating some of the core features of those stand¬ 
ards into a national long-term care program. 


What Role Should the Case Management 
Component of a Long-Term Care Program 
Play With Respect to the Quality of 
Services to Which it Connects People? 

The quality of all kinds of long-term care services 
varies greatly from one agency and individual service 
provider to another. Numerous reports document the 
poor quality of care provided by some nursing homes 
(50,68) and home care agencies (32,66,69), for exam¬ 
ple. At the same time, these reports indicate that 
other nursing homes and home care agencies provide 
excellent care. Differences in quality are typical not 
only of these types of services, but of all kinds of 
long-term care services. 

In theory at least, a long-term care program could 
take several different approaches with respect to the 
quality of the services to which it connects its clients. 
It could not concern itself with the quality of the 
services, and rely on its clients, their families, and 
others who are concerned about quality to obtain for 
themselves any information they need to evaluate the 
services. It could inform its clients that there are sig¬ 
nificant differences in the quality of available services. 


It could refer its clients to specific sources of informa¬ 
tion about the quality of available services or provide 
its clients with information about the quality of avail¬ 
able services. Lastly, it could arrange and pay for 
only services that met specified standards of 
quality (67). 

In practice, the implementation and effectiveness of 
any of these approaches would be hampered by the 
lack of agreed-upon standards for evaluating the qual¬ 
ity of many types of long-term care services and the 
lack of sources of accurate information about the 
quality of services (67). The development of standards 
for evaluating the quality of all types of long-term 
care services is an important priority in the implemen¬ 
tation of a national long-term care program. 

Some programs that allocate long-term care serv¬ 
ices or funding for services have developed proce¬ 
dures for monitoring and controlling the quality of 
the services to which they connect their clients. Cer¬ 
tain of these programs provide services and therefore 
can assure (i.e., assess and correct problems in) the 
quality of those services directly. Other programs 
contract and/or pay for services; these programs 
cannot assure the quality of services provided by any 
particular agency or individual, but they can use their 
contracting and reimbursement procedures to select 
service providers that meet certain standards (see, for 
example, Applebaum, et al., 1988 (10); Balmer, 1988 
(17); Dolan and Holtz, 1986 (26); Mumma, 1987 (48); 
Torres, 1988 (65)). 

Many commentators have suggested that case man¬ 
agers can monitor and control the quality of long¬ 
term care services generally (4,16,27,29,37,57,70), and 
most of the programs that have developed procedures 
for monitoring and controlling the quality of services 
to which they connect their clients involve case man¬ 
agers in that process. Case managers do not automati¬ 
cally monitor and control quality, however. Their 
functions vis-a-vis quality vary greatly, depending on 
factors such as the organization, funding, sponsorship, 
and policies and procedures of the agency that em¬ 
ploys them. 

A recent review of the experiences of case man¬ 
agers in the National Long-Term Care Channeling 
Demonstration illustrates some of these differences 
(11). The Channeling Demonstration, which was 
funded by the U.S. Department of Health and Human 
Services from 1980 to 1985, took place in 10 sites: in 5 
sites, the case managers had funds to purchase serv¬ 
ices, and in five other sites they had only very limited 
funds. Case managers in both types of sites had diffi¬ 
culty controlling the quality of homemaker and per¬ 
sonal care services received by their clients. Some 


157 


sites had contracts with homemaker/home health aide 
agencies, and at those sites, procedures for monitoring 
quality and responding to inadequate services were 
detailed in the contracts. At sites that did not have 
contracts with service providers, procedures for mon¬ 
itoring quality and responding to problems were less 
structured and less formal. Sites that had funds to pur¬ 
chase services used the threat of withholding payment 
to pressure providers into improving their services. 
That option was not available to sites that did not 
have funds to purchase services. 

These findings from the Channeling Demonstration 
and the findings of some State programs that allocate 
long-term care services or funding for services (e.g., 
Ohio’s PASSPORT program and Pennsylvania’s 
LAMP program) suggest that it is not case managers 
per se that monitor and control the quality of long¬ 
term care services but rather case managers in an 
agency or program that has explicit procedures for 
this purpose. Policy makers should not assume that 
simply involving case managers in a long-term care 
program will guarantee that the program will monitor 
and control the quality of services. 

Finally, OTA’s analysis of the potential role of case 
managers and case management agencies with respect 
to the quality of services for people with dementia 
suggests that case managers may be legally con¬ 
strained from referring clients to services based on the 
case managers’ judgments about the quality of the 
services. A 1987 Oregon case Bionic Health Care, Inc. 
v. State of Oregon Department of Human Resources, et 
al. (19) concerned a situation in which case managers 
who worked for a public agency had stopped refer¬ 
ring clients to one nursing home that they believed 
was providing poor care and that was under review 
by the State licensing and certification agency. The 
nursing home sued, arguing that it had a valid State 
license and was certified by Medicare and Medicaid 
and that the case managers could not refuse to refer 
clients there. The nursing home won, and the case 
managers have been instructed not to make recom¬ 
mendations to clients about service providers. 

References 


1. Abrahams, R., Capitman, J., Leutz, W., et al., “Variations in Care Plan¬ 
ning Practice in the Social/HMO: An Exploratory Study,” Gerontologist 
29(6):725-736, 1989. 

2. Abrahams. R., and Lamb, S., “Developing Reliable Assessment in Case- 
Managed Geriatric Long Term Care Programs,” QRB 14(6): 179-186, 1988. 

3. Abrahams, R., Nonnenkamp, L., Dunn, S., et al., “Case Management in 
the Social/Health Maintenance Organization,” Generations 12(5):39-43, 1988. 

4. American Bar Association, Commission on Legal Problems of the El¬ 
derly, “Report to the House of Delegates,” approved by the House of Dele¬ 
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OTA has no information about how often case 
managers in programs that allocate long-term care 
services or funding for services recommend certain 
service providers on the basis of quality. One member 
of the advisory panel for the OTA study interviewed 
case managers who refer people to nursing homes 
found that the case managers generally believed that 
they were legally constrained from making referrals 
on the basis of quality (38). An analysis is needed of 
any legal constraints or legal risks that may be in¬ 
curred by a long-term care program and the agencies 
and case managers that implement it when the case 
managers authorize services on the basis of their 
quality. 


CONCLUSION 

This paper has discussed several different aspects of 
case management and has suggested ideas and options 
that policy makers could consider in designing the 
case management component of a national long-term 
care program. Because of the widespread uncertainty, 
confusion, and disagreement about what case manage¬ 
ment is, it would be easy for policy makers to leave 
difficult policy issues unresolved, to be worked out in 
the case management process. Some of the policy 
issues that could be left unresolved are: what kinds of 
people are eligible for what kinds of services; whether 
the relative emphasis in the program is on cost con¬ 
tainment or providing more services for people; what 
the role of clients and their families should be in deci¬ 
sions about the services they will receive; and 
whether the long-term care program will be respon¬ 
sible in any way for the quality of services to which it 
connects people and if so, how. People who need 
long-term care are extremely diverse, so the applica¬ 
tion of policy decisions in each of these areas to an 
individual client’s situation must be left to the case 
manager’s judgment. The basic policy decisions—that 
create the program structure within which case man¬ 
agers will make judgments about individual client’s 
situations—should be made, however, by those who 
design the system. 


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158 


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sources et aL, Civil No. 87-0816-PA, Nov. 2, 1987. 

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22. Brubaker, T.H., “The Long-Term Care Triad: The Elderly, Their 
Families, and Bureaucracies,” Aging, Health, and the Family, T.H. Brubaker 
(ed.) (Newbury Park, CA: Sage Publications, 1987). 

23. Callahan, J.J., “Paying for Case Management,” Generations 12(5):75,76, 
1988. 

24. Cantor, M., Rehr, H., and Trotz, V., “Workshop II: Case Management 
and Family Involvement,” Mount Sinai Journal of Medicine 48:566-568, 1981. 

25. Capitman, J.A., Haskins, B., and Bernstein, J., “Case Management Ap¬ 
proaches in Coordinated Community-Oriented Long-Term Care Demonstra¬ 
tions,” Gerontologist 26(4):398-404, 1986. 

26. Dolan, K.R., and Holtz, J., “The Commission on Accreditation for 
Home Care in New Jersey,” Caring 5(4):49-50, April, 1986. 

27. Downing, R., “The Elderly and Their Families,” Case Management in 
Human Service Practice, M. Weil and J.M. Karls (eds.) (San Francisco, CA: 
Jossey-Bass Publishers, 1985). 

28. Fessler, S.R., and Adams, C.G., “Nurse/Social Worker Role Conflict 
in Home Health Care,” Journal of Gerontological Social Work 9(1):113—123, 
1985. 

29. Freeman, I.C., “Consumer Advocacy Issues in Case Management,” Im¬ 
proving Access for Elders: The Role of Case Management—Conference Proceed¬ 
ings (Seattle, WA: University of Washington, Institute on Aging, 1986). 

30. Grau, L., “Case Management and the Nurse,” Geriatric Nursing 
5(8):372-375, November/December 1984. 

31. Greene, R.R., Social Work with the Aged and Their Families (New York, 
NY: Aldine de Gruyter, 1986). 

32. Harrington, C.H., Grant, L.A., Ingman, S.R., et al., “The Study of 
Regulation of Home Health Care Agencies in Two States: California and 
Missouri,” Institute for Health and Aging, University of California, San Fran¬ 
cisco, CA, December 1988. 

33. Hereford, R.W., “New Community Services for Older People,” pre¬ 
sented at the 34th annual meeting of the American Society on Aging, San 
Diego, CA, March 1988. 

34. Intergovernmental Health Policy Project, State Financing of Long-Term 
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35. Justice, D., State Long-Term Care Reform: Development of Community 
Care Systems in Six States (Washington, DC: National Governors’ Associa¬ 
tion, April 1988). 

36. Kane, R.A., “Case Management in Health Care Settings,” Case Man¬ 
agement in the Human Service Practice, M. Weil and J.M. Karls and Associ¬ 
ates (eds.) (San Francisco, CA: Jossey-Bass, 1985). 


37. Kane, R.A., “Case Management: Ethical Pitfalls on the Road to High- 
Quality Managed Care,” Quality Review Bulletin 14(5):161—166, 1988. 

38. Kane, R.A., Professor, School of Public Health and School of Social 
Work, University of Minnesota, Minneapolis, MN, statement to the Office of 
Technology Assessment Advisory Panel on Methods of Locating and Ar¬ 
ranging Health and Long-Term Care Services for Persons With Dementia, 
Washington, DC, June 23, 1988. 

39. Kane, R.A., Penrod, J., Davidson, G., et al., Case Management Costs: 
Conceptual Models and Program Descriptions (Minneapolis, MN: University of 
Minnesota, 1989). 

40. Kemper, P., Applebaum, R., and Harrigan, M., A Systematic Compari¬ 
son of Community Care Demonstrations (Madison, WI: University of Wiscon¬ 
sin Institute for Research on Poverty, 1987). 

41. Kerr, M.H., and Birk, J.M., “A Client-Centered Case Management 
Model,” 14(9):279-283, 1988. 

42. Leutz, W., Abrahams, R., Greenlick, M., et al., “Targeting Expanded 
Care to the Aged: Early SHMO Experience,” Gerontologist 28(1):4—17, 1988. 

43. Levine, I.S., and Fleming, M., Human Resources Development: Issues in 
Case Management (Rockville, MD: National Institute of Mental Health, 
1986). 

44. Litwak, E., Helping the Elderly: The Complementary Roles of Informal 
Networks and Formal Systems (New York, NY: Guilford Press, 1985). 

45. Lowy, L., Social Work With the Aging (New York, NY: Longman, 
1985). 

46. Mathematica Policy Research, Inc., Princeton, NJ, The Evaluation of 
the National Long-Term Care Demonstration: Final Report, National Long- 
Term Care Channeling Demonstration, prepared by P. Kemper, R.S. Brown, 
G.J. Carcagno, et al. for the U.S. Department of Health and Human Serv¬ 
ices, Contract No. HHS-100-80-8157, Washington, DC, May 1986. 

47. Mathematica Policy Research, Inc., Princeton, NJ, The Planning and 
Operational Experience of the Channeling Projects, Vol. 1 and Vol. 2, National 
Long-Term Care Channeling Demonstration, prepared by G.J. Carcagno, R. 
Applebaum, J. Christianson, et al. for the U.S. Department of Health and 
Human Services, Contract No. HHS-100-80-8157, Washington, DC, July 
1986. 

48. Mumma, N.L., “Quality and Cost Control of Home Care Services 
Through Coordinated Funding,” Quality Review Bulletin 13(8):271—278, 1987. 

49. Mundinger, M.O., “Community-Based Care: Who Will Be the Case 
Managers?” Nursing Outlook 32(6):294-295, 1984. 

50. National Academy of Sciences, Institute of Medicine, Improving the 
Quality of Care in Nursing Homes (Washington, DC: National Academy of 
Sciences, 1986). 

51. National Association of Social Workers, “NASW Standards and Guide¬ 
lines for Social Work Case Management for the Functionally Impaired,” 
Silver Spring, MD, 1984. 

52. National Council on the Aging, National Institute of Community-Based 
Long-Term Care, “Care Management Standards: Guidelines for Practice,” 
Washington, DC, 1988. 

53. Parker, M., and Secord, L.J., "Private Practice of Case Management,” 
Generations 12(5):54—57, 1988. 

54. Pennsylvania Department of Aging, “LAMP Demonstration Site Pro¬ 
gram Requirements, Planning Allocations and LAMP Contract Format for 
FY 1987-88,” LAMP Bulletin No. 87-1, Harrisburg, PA, June 1, 1987. 

55. Phillips, B.R., Kemper, P., and Applebaum, R.A., “Case Management 
Under Channeling,” Health Services Research 23(1):67—81, 1988. 

56. Phillips, B.R., and Schneider, B., “The Appropriateness and Consist¬ 
ency of Assessments in the Pennsylvania Long-Term Care Assessment and 
Case Management Program: Final Report,” Mathematica Policy Research 
Inc., Princeton, NJ, june 30, 1988. 

57. Sabatino, C.P., “Homecare Quality,” Generations 13(1):12—16, 1989. 

58. Schneider, B., “Care Planning: The Core of Case Management,” Gen¬ 
erations 12(5): 16-18, 1988. 

59. Seltzer. M.M., Ivry, J., and Litchfield., J., “Family Members as Case 
Managers: Partnership Between the Formal and Informal Support Net¬ 
works,” Gerontologist 27(6):722-728, 1987. 

60. Seltzer, M.S., Simmons, K., Ivry, J., et al., “Agency-Family Partner¬ 
ships: Case Management of Services for the Elderly,” Journal of Gerontologi¬ 
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61. Silverstone, B., and Burack-Weiss, A., Social Work Practice With the 
Frail Elderly and Their Families: The Auxiliary Function Model (Springfield, 
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62. Simmons, K.H., Ivry, J., and Seltzer, M.M., “Agency-Family Collabo¬ 
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(Lexington, MA: Lexington Books, D.C. Heath & Co., 1983). 

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E. Shanas and M B. Sussman (eds.) (Durham, NC: Duke University Press, 
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66. U.S. Congress, House of Representatives, Select Committee on Aging, 
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July 1988. 


160 


ROLE OF FEDERAL AND STATE GOVERNMENTS 
AND VOLUNTARY ORGANIZATIONS IN ASSUR¬ 
ING QUALITY OF CARE IN SELECTED LONG¬ 
TERM CARE SERVICES 


Carol O’Shaughnessy and Richard Price * 


This is in response to your request for information 
on the role of Federal and State Governments and 
voluntary organizations in assuring quality of care for 
selected long-term care services. For purposes of our 
review, we have defined long-term care services as 
being provided in four distinct settings: (1) nursing 
homes, (2) the home, and (3) adult day care, and (4) 
board and care homes. Home care includes both 
home health care and nonmedical supportive services, 
such as personal care, homemaker, and chore services. 
This memorandum discusses Federal and State re¬ 
quirements and the activities of voluntary organiza¬ 
tions aimed at assuring quality of care in each of these 
settings. 


INTRODUCTION 

Assessment of quality care in long-term care serv¬ 
ices generally includes three components: establish¬ 
ment of standards of care; monitoring the degree to 
which standards are met; and enforcement of stand¬ 
ards. Assessing quality of care for long-term care 
services is difficult, due partially to the wide range of 
settings in which long-term care services are provided 
and the complex needs of chronically impaired popu¬ 
lations. Settings range from skilled nursing homes 
where patients receive intensive nursing services to 
home and community-based services which respond 
to a variety of supportive service needs. Federal ef¬ 
forts to assure quality has generally been devoted to 
the review of the structure and process by which 
long-term care providers deliver services, for exam- 

* Prepared for the U.S. Bipartisan Commission on Comprehensive Health 
Care (The Pepper Commission), by Carol O’Shaughnessy and Richard Price, 
Specialists in Social Legislation, Education and Public Welfare Division, 
Congressional Research Service, August 25, 1989. 


pie, by focusing on the organization of the provider, 
and staff qualifications and training. Recently some 
Federal attention has been directed at client-centered 
assessment procedures in nursing homes and home 
health services. 

Although a number of Federal programs support 
long-term care services—primarily Medicaid, Medi¬ 
care, the Social Services Block Grant Program 
(SSBG), the Older Americans Act, and the Supple¬ 
mental Security Income (SSI) Program—Federal re¬ 
quirements for assuring quality of care through the 
establishment, monitoring, and enforcement of stand¬ 
ards vary significantly across these programs. In part 
because of the large commitment of Federal dollars to 
nursing home care under the Medicaid and Medicare 
programs, concern with quality of long-term care 
services has focused on this particular setting during 
the past two decades. However, in the past few years, 
quality of home care has also become an important 
issue for policymakers. This relatively new interest 
has come with awareness of a rapidly growing home 
health care industry and increasing expenditures 
under the Medicare program. The number of home 
health agencies participating in Medicare has more 
than doubled in less than a decade—from 2,858 in 
1979 to 5,769 in 1988. Program payments for home 
health care increased from $542 million in 1979 to 
$2.6 billion in 1988. Quality issues in home care have 
also arisen as the nature of services delivered in the 
home has changed and as more technologically inten¬ 
sive services requiring greater expertise from home 
care personnel have come on the market. In addition, 
quality of home care has become more prominent as 
Congress considers a variety of proposals to increase 
Federal support for home and community-based care. 


161 



While each of the programs mentioned above sup¬ 
port home care services, only the Medicare and Med¬ 
icaid programs contain specific Federal requirements 
pertaining to standards of care for home health care 
services. The establishment, monitoring, and enforce¬ 
ment of standards for nonmedical home care services, 
such as homemaker and chore, is the responsibility of 
State government. Similarly, the responsibility for 
oversight of the quality of adult day care programs 
and board and care facilities rests with States. State 
policies vary significantly as to methods used to assess 
quality and to monitor and enforce standards for these 
community-based services. 


NURSING HOME CARE 

The National Nursing Home Survey of 1985, the 
latest national survey of nursing homes in the coun¬ 
try, estimates that there were approximately 19,100 
nursing and related care homes at that time. These 
nursing homes had 1.6 million beds and about 1.5 mil¬ 
lion residents. The services provided by these facili¬ 
ties range from highly skilled medical, nursing, and 
rehabilitative services to health-related, personal and 
supportive care for persons with chronic impairments. 


Federal Requirements 

Medicare and Medicaid —Medicare and Medicaid 
law and regulations specify requirements that nursing 
homes (skilled nursing facilities, in the case of Medi¬ 
care, and skilled nursing facilities and intermediate 
care facilities (ICFs), in the case of Medicaid) must 
meet in order to participate in these programs. In gen¬ 
eral, these requirements specify standards for staffing, 
provision of services, and organization that are in¬ 
tended to assure the health and safety of residents. In 
order to determine that nursing homes meet these re¬ 
quirements, the Secretary of Health and Human Serv¬ 
ices (HHS) enters into agreements with States to 
survey facilities on an annual basis. Nursing homes 
that are found by State survey agencies (generally, 
the State’s licensure and certification agency) to 
comply with requirements are certified for participa¬ 
tion. The Health Care Financing Administration 
(HCFA), for nursing homes wishing to participate in 
Medicare, and State Medicaid agencies, for nursing 
homes wishing to participate in Medicaid, then decide 
whether to enter into an agreement with a nursing 
home to allow the facility to receive reimbursement 
under the programs. According to the National Nurs¬ 
ing Home Survey of 1985, 76 percent of all nursing 
homes and 89 percent of all beds in these facilities 


were certified to participate in Medicare and/or Med¬ 
icaid at that time. 

Recently, the Omnibus Budget Reconciliation Act 
of 1987 (OBRA 87) included provisions, commonly 
referred to as nursing home reform, that comprehen¬ 
sively revise the statutory authority for nursing home 
certification. Implementation of these provisions is to 
be phased in from 1988 through 1991, with major sec¬ 
tions of the new law becoming effective October 1, 
1990. When these provisions become fully effective, 
they will— 

• establish in Medicare and Medicaid law a very 
similar set of requirements that nursing homes 
must meet in order to participate in the pro¬ 
grams, including requirements as to the scope of 
services nursing homes must provide, levels of 
staffing in the facility and qualifications of staff, 
assessment of each resident’s functional capacity, 
and residents’ rights, among others; 

• require an unannounced standard survey of 
nursing homes that is focused on residents and 
outcomes of the care they receive, as well as ex¬ 
tended surveys for those facilities found to be 
providing substandard care; and 

• expand the sanctions that States and HCFA may 
impose against noncompliant nursing homes. 

The enclosed CRS report, Medicare and Medicaid 
Nursing Home Reform Provisions in the Omnibus 
Budget Reconciliation Act of 1987, P.L. 100-203, pro¬ 
vides additional background information on nursing 
home certification under Medicare and Medicaid, as 
well as a detailed summary of the enacted legislation. 

In addition to requirements for the certification of 
nursing homes wishing to participate in Medicare 
and/or Medicaid, the Omnibus Budget Reconciliation 
Act of 1986 (OBRA 86) contained two provisions au¬ 
thorizing peer review organizations (PROs) to review 
the quality of care provided Medicare beneficiaries in 
post-hospital settings, including nursing homes. One 
provision requires PROs to review early readmissions 
of Medicare beneficiaries to hospitals (those occurring 
within 31 days of a previous hospital discharge) to de¬ 
termine if inpatient hospital and post-hospital services, 
including skilled nursing facilities, meet professionally 
recognized standards of care. OBRA 86 also requires 
PROs to allocate a reasonable portion of their activi¬ 
ties to review the quality of services among different 
cases and settings, including post-acute services pro¬ 
vided by skilled nursing facilities, regardless of 
whether a readmission has taken place. HCFA has 
chosen to implement only the readmission require¬ 
ment of OBRA 86, arguing that the existing 


162 


survey and certification process addresses the second 
requirement. 

Older Americans Act—While Medicare and Medi¬ 
caid requirements for certifying nursing homes have 
generally focused on quality of care by review of fa¬ 
cilities’ compliance with standards related to services, 
staffing, and health and safety of residents, another 
Federal program takes a consumer-based approach to 
defining quality of care. Under provisions of the 
Older Americans Act, each State agency on aging 
must establish a State long-term care ombudsman 
office which is responsible for investigating and re¬ 
solving complaints made by, or on behalf of, residents 
of nursing homes, board and care facilities, and other 
adult care homes. Ombudsmen are required to investi¬ 
gate and resolve complaints of residents 1 related to 
the action, inaction, or decisions of long-term care 
providers, or their representatives, or of public agen¬ 
cies and social services agencies which may adversely 
affect residents’ health, safety, welfare, or rights. 
Under provisions of the Older Americans Act and 
OBRA 87, ombudsmen are required to have access to 
long-term care facilities and to patient records. OBRA 
87 also required that State agencies responsible for 
surveying nursing homes share the results of their 
Medicare/Medicaid surveys with the State long-term 
care ombudsman. 

The Older Americans Act specifies a number of 
other requirements aimed at assuring that the ombuds¬ 
man program act as an advocate on behalf of resi¬ 
dents on a statewide basis. In addition to individual 
resident complaint investigation, the law requires om¬ 
budsmen to analyze and monitor the implementation 
of Federal, State, and local policies affecting residents 
and to appropriate actions to improve quality of care. 
Ombudsmen are also required to develop a statewide 
reporting system to identify and resolve significant 
problems in facilities and to submit this information to 
the State agency responsible for licensing or certify¬ 
ing long-term care facilities. 

While Older American Act funds are available to 
support ombudsman staff at both the State and local 
levels, to a large extent the program relies on volun¬ 
teer ombudsmen. In FY 1987, out of over 9,800 staff 
devoted to the ombudsman program, about 88 percent 
were volunteers. The Administration on Aging (AoA) 
reports that in FY 1987 over 110,000 complaints were 

1 The Older Americans Act supports services and programs for persons 
aged 60 and over. According to an analysis by the National Association of 
State Units on Aging (NASUA), of 35 States which have enacted State laws 
pertaining to the ombudsman program, 22 laws do not specify an age limita¬ 
tion for residents who may receive ombudsman services. NASUA, An Analy¬ 
sis of Policies and Procedures of State Long Term Care Ombudsman Offices 
(September 1988), 31. 


received by ombudsmen, a 63 percent increase since 
FY 1982. 2 


State Regulation 

In addition to surveying nursing homes for Medi¬ 
care and/or Medicaid certification, States, through 
their licensure and certification agencies, also conduct 
licensure inspections of nursing homes. As noted 
above, not all nursing homes are Medicare/Medicaid 
certified. For certified and non-certified facilities 
alike, all States have licensing laws pertaining to nurs¬ 
ing homes that specify requirements nursing homes 
must meet in order to operate in the State. As is the 
case with Federal regulation, State licensing includes: 
(1) requirements for provision of services, staffing, 
and assuring the health and safety of residents; (2) in¬ 
spections of facilities; and (3) sanctions and penalties 
that may be imposed against deficient nursing homes. 
Certain States use Medicare/Medicaid certification re¬ 
quirements as a foundation for their licensing laws 
and may include additional requirements for nursing 
homes to operate in the State. 

An Institute of Medicine (IOM) survey of the di¬ 
rectors of State licensure and certification agencies, as 
reported in Improving the Quality of Care in Nursing 
Homes, found that just over half (24/47) of the re¬ 
spondents judged their State’s licensure requirements 
for intermediate care facilities more stringent than 
those of the Federal Government; one-quarter (11/47) 
said they were the same; and one-quarter (12/47) said 
they were less stringent. 3 One-third (17/47) of the di¬ 
rectors stated that their State’s licensure requirements 
for skilled nursing facilities are more stringent than 
the Federal requirements; one-third (14/47) said they 
were about the same; and one-third (14/47) said they 
were less stringent. 

According to this IOM survey, most agencies 
conduct licensure inspections once every 12 months 
(40/47). 4 Nearly all State survey agencies indicated 
that they have at least several licensure sanctions 
available to them, but very few were applying any 
formal sanctions, State or Federal. The IOM survey 
found that 85 percent of the total actions against 
noncompliant nursing homes were taken in 13 States. 5 


2 Administration on Aging, FY 1988 Report to Congress on Long-Term Care 
Ombudsman Activities Under Title III of the Older Americans Act, FY 1987 
(December 1988). 

3 Institute of Medicine. Improving the Quality of Care in Nursing Homes 
(Washington, D.C.: National Academy Press, 1986), 319-320. 

4 Institute of Medicine, Improving Quality, 320. 

5 Institute of Medicine, Improving Quality, 321. 


163 




Voluntary Organizations 

Nursing homes may voluntarily obtain accreditation 
from the Joint Commission on Accreditation of 
Healthcare Organizations (JCAHO), as meeting cer¬ 
tain standards for providing quality care. Specifically, 
JCAHO accredits nursing homes that are licensed by 
their States and have 24-hour registered nurse cover¬ 
age. About 1,100 nursing homes have been accredited 
by JCAHO. Accreditation surveys are announced in 
advance and include on-site observations of the facil¬ 
ity. If it is found to be in substantial compliance with 
Joint Commission standards, a facility is awarded ac¬ 
creditation for 3 years and is not resurveyed until the 
end of its accreditation cycle (although JCAHO may 
conduct interim surveys for organizations accredited 
with certain kinds of problems). According to 
JCAHO, standards for accreditation are similar to re¬ 
quirements for Federal certification. * * 6 


HOME CARE 

Home care is a generic term encompassing a 
number of different services and functions. Home care 
services range from highly complex functions pro¬ 
vided by skilled personnel, such as registered nurses 
and therapists, to personal care and housekeeping 
services provided by nontechnical personnel such as 
home health aides and homemakers. There are no uni¬ 
form Federal standards by which to judge the quality 
of the broad range of home care services supported 
by each of the major Federal funding sources. Medi¬ 
care finances home health services provided by 
agencies which must meet federally prescribed re¬ 
quirements. However, other Federal programs, such 
as the Older Americans Act and the SSBG, provide 
funds for nonmedical home care services to State 
agencies which have wide flexibility in defining qual¬ 
ity of care. A recent study of State home care quality 
assurance programs indicated that this fragmented ac¬ 
countability makes assurance of quality of care diffi¬ 
cult to achieve. 7 

The total number of home care providers which 
provide one or more home care services is difficult to 
gauge. There are about 6,000 Medicare-certified home 
health agencies. It is estimated that another 6,000 
agencies provide services similar to Medicare’s home 
health benefits (as well as other paraprofessional home 
care services) but are not certified by Medicare. 8 In 


8 This information was obtained in a telephone conversation with JCAHO 

on Aug. 14, 1989 and from JCAHO’s 1988 Long-Term Care Standards 

Manual. 

7 U.S. Department of Health and Human Services, Office of the Assistant 
Secretary for Planning and Evaluation, Review of State Quality Assurance Pro¬ 
grams for Home Care (April 1989), sec. I, 3. 

8 Charles Sabatino, “Homecare Quality,” Generations (Winter 1989): 13. 


addition, according to the National Association for 
Home Care (NAHC) the number of agencies provid¬ 
ing only nonmedical supportive home care services, 
such as homemaker and chore services, is estimated to 
be about 4,000 to 6,000. The total number of agencies 
providing home care services may be as high as 
20 , 000 . 


Federal Requirements 

Medicare and Medicaid—The Medicare program 
covers a variety of medically-related home health 
services for persons who meet certain qualifying 
criteria. Covered services must be provided by a 
home health agency that is certified to participate in 
the program. Medicare law and regulations specify 
the requirements that home health care agencies must 
meet in order to participate. These requirements 
specify standards for staffing, provision of services, 
and organization that are intended to assure the health 
and safety of residents. As in the case of nursing 
home care, the Secretary of HHS uses State licensure 
and certification agencies to survey home health 
agencies to determine their compliance with these 
requirements. 

OBRA 87 included provisions that revise the certi¬ 
fication process for home health agencies participating 
in Medicare. The approach adopted in OBRA 87 for 
assuring quality home health care is similar to the ap¬ 
proach used for nursing home care. Specifically, 
OBRA 87— 

• establishes new requirements for home health 
agencies that emphasize patients’ rights and train¬ 
ing of home health aides; 

• requires an unannounced standard survey that in¬ 
cludes visits to patients’ homes and an extended 
survey of those agencies found to be providing 
substandard care; and 

• expands the sanctions that may be imposed 
against agencies that do not comply with the re¬ 
quirements for participation. 

OBRA 87 contained certain other related provi¬ 
sions. It requires that State or local survey agencies 
maintain a toll-free hotline (1) to collect, maintain, 
and continually update information on home health 
agencies certified to participate in Medicare, including 
information on deficiencies in providing care, correc¬ 
tive actions, and sanctions imposed, and (2) to receive 
complaints and answer questions about agencies. 
OBRA 87 also requires States to maintain a unit that 
can investigate complaints and that has enforcement 


164 



authority and access to survey and certification re¬ 
ports and consumer medical records. 

In addition to Federal certification requirements, 
the OBRA 86 requirements described above for PROs 
to review the quality of care provided to Medicare 
beneficiaries in post-hospital settings apply to home 
health care. As noted, HCFA has chosen to imple¬ 
ment only the readmission requirement of OBRA 86, 
arguing that the existing survey and certification 
process addresses the more general requirement for 
reviewing the quality of post-hospital services, includ¬ 
ing home health care. 

States also cover home health services under their 
Medicaid plans. The Federal Medicaid statute does 
not define the term home health services. However, 
Medicaid regulations require States to include a mini¬ 
mum range of home health services in their Medicaid 
programs. These include nursing services, home 
health aide services, and medical supplies and equip¬ 
ment. At the State’s option, home health services may 
also include physical and occupational therapy, 
speech pathology, and audiology services. 

Under Medicaid, home health services are provided 
by home health agencies or facilities licensed by the 
State to provide medical rehabilitation services. Al¬ 
though the law does not define the term home health 
agency, Medicaid regulations define it as a public or 
private agency or organization, or a subdivision of 
such an agency or organization, that meets the re¬ 
quirements for participation in the Medicare program. 

States, at their option, may also cover personal care 
services under their Medicaid plans. In 1987, 26 States 
did so. Medicaid regulations require that personal 
care services be provided in a beneficiary’s home and 
be prescribed by a physician in accordance with a re¬ 
cipient’s plan of treatment. These services must be 
provided by an individual who is qualified to provide 
the services, who is supervised by a registered nurse, 
and who is not a member of the recipient’s family. 
States have a great deal of flexibility in defining who 
is qualified to provide personal care services. In gen¬ 
eral, Medicaid allows States to follow their own pro¬ 
cedures for certifying noninstitutional providers of 
care. Medicaid regulations contain a general re¬ 
quirement that a State’s plan include a description of 
methods and standards used to assure that services are 
of high quality. This would apply to personal care 
providers and State determinations as to who is a 
qualified provider of these services. 

Finally, Medicaid authorizes States to cover a 
variety of nonmedical community-based services 
under home and community-based waivers, often re¬ 


ferred to as “2176 waivers.” Services which may be 
provided under the waiver include case management, 
homemaker/home health aide services, personal care 
services, adult day health care services, habilitation 
services, respite care, and other services. As of March 
31, 1989, 48 States had waivers to provide home and 
community-based services to aged and disabled, men¬ 
tally retarded, and/or mentally ill persons who would 
otherwise require institutional care. To have a waiver 
request approved by HCFA, a State must provide 
satisfactory assurances to the Secretary as to the safe¬ 
guards taken to protect the health and welfare of 
recipients of services. Medicaid regulations imple¬ 
menting this provision of law require that these safe¬ 
guards include (1) adequate standards for all types of 
providers that provide services under the waiver; (2) 
assurance that the standards of any State licensure or 
certification requirements are met for services or for 
individuals furnishing services that are provided under 
the waiver; and (3) assurance that all board and care 
facilities in which home and community-based serv¬ 
ices will be provided are in compliance with Federal 
and State requirements for facilities in which a signifi¬ 
cant number of SSI recipients reside. 

Social Services Block Grant Program—The SSBG 
provides funds to States for a broad range of social 
services. The Federal law gives States wide discretion 
as to what services to provide as long as services 
meet certain general goals, such as preventing or re¬ 
ducing inappropriate institutional care. In FY 1988, 45 
States planned to provide a range of nonmedical 
home-based services to individuals and families under 
their State SSBG plans. 9 Home-based services are de¬ 
fined as homemaker, chore, home health, companion¬ 
ship, and home maintenance. There are no Federal 
requirements related to standards for home-based care 
provided with SSBG funds. 

Older Americans Act—Under the Older Americans 
Act, each State agency on aging receives funds for 
home care services. 10 Funds are administered in local 
communities by area agencies on aging. As is the case 
under the SSBG, title III provides funding for 
nonmedical home care services, including home¬ 
maker, home health aide, and chore services, visiting 
and telephone reassurance, and respite care for family 
caretakers. Although the law does not contain specific 


9 This information was provided in a telephone conversation with the 
Office of Human Development Services staff. Under provisions of the SSBG, 
States are required to submit to HHS information on the intended use of 
funds for the upcoming fiscal year. 

10 Funds are provided to States under title III—B of the Older Americans 
Act for a broad range of social services. Under title III—B home care services 
are considered a priority service. State agencies are required to specify what 
proportion of title III—B funds are to be spent on home care services by each 
local area agency on aging. In addition to the authority under title III—B, the 
1987 amendments to the Act created a separate authorization of funds for in- 
home services for the frail elderly under a new title III-D. Each State re¬ 
ceives a separate allotment of funds for such services. 


165 



requirements related to quality of home care services, 
such as the development, monitoring, or enforcement 
of standards of care, both title III law and regulations 
contain general requirements that State and area agen¬ 
cies are to conduct periodic evaluation of services 
provided under State and area plans on aging. In 
keeping with the advocacy role intended for area 
agencies on aging, the law specifically charges area 
agencies with responsibilities for monitoring service 
programs affecting the elderly. In addition, under the 
Federal statute area agencies are responsible for co¬ 
ordinating services provided under title III with other 
service providers. 

In addition to the mandate under title III of the 
Older Americans Act, some activity with respect to 
home care quality assurance has been undertaken 
under the title IV research and demonstration author¬ 
ity. In FY 1988 AoA funded 12 States to carry out a 
variety of quality assurance projects. 11 


State Requirements 

As indicated above, Medicaid requires States to cer¬ 
tify Medicaid-funded home health care providers 
using criteria based on the Medicare requirements for 
participation. Beyond Federal certification, State re¬ 
quirements aimed at quality of home care vary 
widely. The most common form of State regulatory 
action is State licensure policies requiring agencies 
providing home health care services to meet certain 
standards before being authorized to operate in the 
State. According to the NAHC, 39 States have licen¬ 
sure requirements for home health care agencies. 12 
Relatively few States apply licensing requirements 
to agencies which provide nonmedical home care 
services. 

A recent DHHS-sponsored study, Review of State 
Quality Assurance Programs for Home Care (April 
1989), surveyed 19 States to identify their home care 
quality assurance mechanisms. The study looked at 
standard setting and monitoring and enforcement pro¬ 


11 Projects are listed in Compendium of Active Grants Under Title IV of the 
Older Americans Act. Nov. 1988. Also, the 1987 amendments to the Older 
Americans Act authorized the Commissioner on Aging to demonstrate and 
evaluate the effectiveness of consumer protection for older persons who re¬ 
ceive publicly funded home care services. These projects are to provide 
consumer protection through State and local ombudsman, legal assistance 
agencies, and may include the use of hotlines, complaint investigation, and 
advocacy. FY 1989 and FY 1990 funding for these projects is subject to a 
trigger (no funds may be appropriated unless funding for the Act increases 
by 5 percent over the FY 1987 level). No funding was appropriated in FY 
1989. 

12 National Association for Home Care, Home Care. State Licensure and 
Certificate of Need (March 1989). This includes the number of States that li¬ 
cense Medicare certified as well as non-Medicare certified home health agen¬ 
cies. According to this analysis, there are seven States which apply licensure 
policies to Medicare certified providers, but which do not license non-Medi- 
care certified providers. In addition, two States license non-Medicare certi¬ 
fied agencies but do not license certified providers. 


cedures and found great variation in quality assur¬ 
ance methods employed as well as implementation 
strategies. 

The study identified the following standards used 
by one or more States to measure or assess quality: (1) 
training requirements for home care workers, such as 
specification of number of hours of required training, 
competency testing, and/or prescribed curriculum; (2) 
certification or registration of workers who meet cer¬ 
tain State-prescribed training programs; (3) licensure 
of providers; (4) accreditation of providers according 
to criteria developed by an independent accreditation 
body such as the Joint Commission on Accreditation 
of Healthcare Organizations, the National League for 
Nursing, or the National HomeCaring Council; (5) 
requirements for State approval of agencies or pro¬ 
viders (usually applied to nonmedical home care pro¬ 
viders); (6) establishment of client bill of rights; (7) 
requirements for a code of ethics for aides; (8) crimi¬ 
nal record checks on workers; and (9) requirements 
for minimum pay levels for workers. The most fre¬ 
quently reported standards used by the States in this 
survey were training requirements for workers and li¬ 
censure of providers (the latter usually applies to 
home health agencies rather than nonmedical home 
care providers). Other standards were used less 
frequently. 

The study also identified a number of monitoring 
mechanisms used by States to determine compliance 
with standards, and found considerable variation 
among methods used. For example, while the most 
frequent means of monitoring was worker supervision, 
requirements ranged from minimum to frequent super¬ 
vision. Provider surveys are universally used to moni¬ 
tor home health agencies and are tied to Medicaid 
certification, State licensing and accreditation proce¬ 
dures. In some cases provider surveys are also used 
for monitoring nonmedical home care services. Other 
common monitoring mechanisms were case manage¬ 
ment procedures (more common with nonmedical 
home care providers) and contract reviews. Few pro¬ 
grams monitored the impact of services on clients. 

The survey found that the most frequently used en¬ 
forcement mechanism used by States were economic 
penalties, such as cancellation, denial, or suspension of 
provider contracts, or withholding of funds. Other 
economic penalties included reassigning clients to 
competing providers, withholding referrals, and limit¬ 
ing the extent of a provider’s service delivery (e.g., 
limiting services to specified geographic areas or the 
type of service that may be provided by individual 
providers). Economic penalties were found to be in¬ 
fluenced by availability of providers. 


166 



Quality assurance mechanisms also vary according 
to funding source. The survey found that health and 
medically related home care programs funded by 
Medicaid had more formal quality assurance require¬ 
ments than programs funded by the SSBG or the 
Older Americans Act. This is because Medicaid home 
health providers are required to meet the Medicare 
conditions of participation for home health services. 
Both the SSBG- and Older Americans Act-funded 
programs frequently had worker training requirements 
although great variation existed in the type of training 
requirements. Both SSBG and Older Americans Act 
programs relied on worker supervision and case man¬ 
agement techniques to monitor services although 
again the study found great variation in the way in 
which such monitoring is carried out. Both programs 
also relied on economic sanctions as means to enforce 
standards. 

Attachment A presents a detailed listing of State 
quality assurance mechanisms used by States for home 
care programs funded under Medicaid’s personal care 
option and 2176 waiver programs and the SSBG and 
Older Americans Act programs. 

Another means of monitoring home care services 
used by a few States is the Older Americans Act 
long-term care ombudsman program. According to 
the HHS study on home care quality assurance, five 
States have a specific legislative mandate to expand 
the ombudsman program to home care (Wisconsin, 
Wyoming, Maine, Virginia, and Minnesota). In an¬ 
other State (New York) some local ombudsmen 
handle complaints of some home care recipients. In 
none of these States are the programs fully oper¬ 
ational statewide. Although some officials believe that 
the ombudsman concept can be useful in assuring 
quality of care, the HHS report indicated that they do 
not see it as a major quality assurance tool. Reasons 
for this include the fact that the ombudsman role is a 
problem-solving tool for individuals and not a moni¬ 
toring tool; funding for the ombudsman program is 
limited and the program is already overburdened with 
complaint resolution for residents of facilities; and re¬ 
cipients of home care services may be resistant to 
filing complaints against a home care provider if their 
only alternative is nursing home placement. 13 


Voluntary Organizations 

If they wish to do so, home care providers may 
voluntarily obtain accreditation from organizations 
that survey providers to determine whether they meet 

13 Department of Health and Human Services. Review of State Quality, 
Assurance Programs for Home Care, III— 1 through III—7. 


standards for providing quality care, as defined by 
the accrediting organization. With the assistance of 
professionals in the field, three national organiza¬ 
tions have established such standards for home care 
providers. 

The National Homecaring Council (NHCC) has es¬ 
tablished recommended standards and an accreditation 
program for homemaker/home health aide services. 
This accreditation program involves peer review of 
homemaker/home health aides services only. The 
standards cover four components for the admin¬ 
istration of homemaker/home health aide services, in¬ 
cluding structure of the agency, staffing, services 
provided, and community activities. The accreditation 
program includes agency self-study and an on-site 
peer review by Council staff every 3 years. Accord¬ 
ing to NHCC, there are currently about 100 home¬ 
maker/home health aide providers which have chosen 
to be part of this accreditation process, with about 40 
additional agencies in the pipeline. Most of the agen¬ 
cies covered by this accreditation process provide 
only homemaker/home health aide services, with a 
few also providing home health care services. 14 

The Joint Commission on Accreditation of 
Healthcare Organizations (JCAHO) also has an ac¬ 
creditation program for a variety of organizations 
providing home care services. 15 JCAHO accredits 
four different kinds of home care providers: home 
health agencies; durable medical equipment companies 
providing equipment in the home; infusion therapy 
companies providing a variety of intravenous services; 
and private duty home care agencies that provide 
nursing services as well as homemaker, home health 
aide, and companion services. JCAHO has accredited 
about 500 agencies and organizations. Accreditation 
standards for these organizations vary according to 
the particular service being provided by the organiza¬ 
tion. Accreditation surveys are announced in advance 
and include on-site observations of the organization as 
well as visits to clients’ homes. If it is found to be in 
substantial compliance with Joint Commission stand¬ 
ards, an organization is awarded accreditation for 3 
years and not resurveyed until the end of its accredi¬ 
tation cycle (although JCAHO may conduct interim 
surveys for organizations accredited with certain 
kinds of problems). 

The National League for Nursing (NLN) also ac¬ 
credits a variety of home care programs, including 
home health agencies, private duty home care agen- 


14 This information was obtained in a telephone conversation with NHCC 
on Aug. 18, 1989. 

15 This information was obtained in a telephone conversation with JCAHO 
on Aug. 21, 1989, and from JCAHO’s 1988 Standards for the Accreditation of 
Home Care. 


167 




cies, public health nursing programs (components of 
local departments of health), community nursing cen¬ 
ters, infusion therapy companies, home medical equip¬ 
ment companies, and home pharmacy services. 16 
NLN has accredited about 200 programs. Accredita¬ 
tion standards include certain core standards that are 
applied to all agencies, as well as program specific 
standards that are applied to particular services. Sur¬ 
veys to determine compliance with standards include 
both on-site observation of the agency and visits to 
the homes of clients. For those agencies found to 
meet NLN standards, accreditation lasts for 3 years. 
NLN is currently implementing a new survey process 
for accreditation. During the 3-year accreditation 
cycle for a particular agency, NLN will conduct un¬ 
announced annual site visits. These site visits will in¬ 
clude visits to the home and a survey of client 
satisfaction. 


Adult Day Care 

Generally, adult day care programs provide a 
variety of health and social services to persons with 
physical, emotional, or mental impairments in a group 
setting on a part-time basis. There is no federally rec¬ 
ognized definition of day care. 17 Services which may 
be included in a day care program are: assessment of 
client needs; health monitoring; skilled nursing 
services; physical, occupational, and speech therapies; 
personal care; nutritional services; counseling; and 
transportation. Depending upon the needs of partici¬ 
pants, care provided may range from active rehabilita¬ 
tion in a post-acute phase of an illness to the provision 
of one or more health or health-related social 
services. 

It is estimated that there may be between 2,100- 
2,600 adult day care programs. 18 Programs are sup¬ 
ported primarily through the Medicaid, SSBG, and 
Older Americans Act programs, and through State 
and private funds. States have great flexibility in de¬ 
fining standards, and monitoring and assuring compli¬ 
ance with standards. 

A distinction is made between a health model and a 
social model for adult day care programs. Generally 


16 This information was obtained in a telephone conversation with NLN 
on Aug. 22, 1989. 

17 In 1984, as part of a project to develop national standards for adult day 
care, the National Institute on Adult Daycare (NIAD) of the National Coun¬ 
cil on Aging (NCOA) defined the service in part as follows: Adult day care 
is a community-based group program designed to meet the needs of function¬ 
ally impaired adults through an individual plan of care. It is a structured, 
comprehensive program that provides a variety of health, social, and related 
support services in a protective setting during any part of a day but less than 
24-hour care. 

18 This is an unofficial estimate based on data being obtained by re¬ 
searchers at the University of California, San Francisco under contract with 
HCFA. 


the combination of health and social services offered, 
the kinds of participants served, and the kinds and 
number of staff involved in the program distinguish 
models from one another. Standards applicable to the 
varying models of day care may vary, depending on 
the model of day care funded. For example, a health- 
oriented day care program may be subject to specific 
nurse staffing standards, as compared to a social serv¬ 
ices model which would emphasize social services 
staff. 


Federal Requirements 

Medicaid—States may cover adult day care services 
under two provisions of the Medicaid program: as an 
optional service under their State Medicaid plans 
(under the clinic services and rehabilitative services 
options) or as part of their 2176 home and commu¬ 
nity-based waiver programs. In addition, to the extent 
that other covered Medicaid services are provided in 
an adult day care setting (e.g., physician services), 
they may be covered under the program. In general, 
Medicaid allows States to follow their own proce¬ 
dures for certifying noninstitutional providers. Medi¬ 
caid regulations contain general requirements that 
each State Medicaid plan include a description of the 
methods and standards used to assure that covered 
services are of high quality. There are no Federal 
standards or monitoring or enforcement mechanisms 
specifically applicable to adult day care centers 
funded under Medicaid. 

Adult day care programs funded under the 2176 
waiver authority must meet the requirements de¬ 
scribed above in the discussion of quality assurance 
requirements for 2176 services. 

Other Federal Programs—In FY 1988, 23 States 
planned to use SSBG funds to support adult day care 
services. 19 There are no Federal requirements related 
to standards for adult day care services provided with 
SSBG funds. 

State agencies on aging may use funds authorized 
under title III of the Older Americans Act funds to 
support adult day care services. As in the case with 
home care services provided under the Older Ameri¬ 
cans Act discussed above, there are no specific Fed¬ 
eral quality assurance requirements with respect to 
adult day care programs funded under the Older 
Americans Act. Title III law and regulations contain 
general requirements that State and area agencies are 

19 This information was obtained in a telephone conversation with the 
Office of Human Development Services staff. 


168 




to conduct periodic evaluation of services provided 
under State and area plans on aging. 


State Requirements 

Very little evaluative data are available on the 
extent to which States have established standards and 
procedures for assuring the quality of adult day care. 
Two studies have collected information on standard 
setting. According to a recent survey of State regula¬ 
tion of adult day care (specifically focusing on day 
care centers in the health model) by the Intergovern¬ 
mental Health Policy Project, 35 States have stand¬ 
ards for day care facilities. 20 The survey reviewed 
whether States had requirements for licensure of fa¬ 
cilities, certification of facilities, or standards used to 
assess the eligibility of centers for particular sources 
of funding. It found that 22 States had licensure re¬ 
quirements. In addition, 13 States used standards to 
certify facilities or to otherwise determine a facility’s 
eligibility for a particular funding source. 21 However, 
the number and type of standards used by States 
varied significantly. For example, of the 22 States 
which had licensure requirements, nine States had op¬ 
tional or unspecified requirements for regular on-site 
nursing supervision of participants. While most States 
specified minimum staff/participant ratios, some speci¬ 
fied only that the program have “sufficient staff.” 

The study indicated that licensure or certification 
may not assure uniformity of day care services in a 
State; for example, some States may license or certify 
only the social day care model while others may li¬ 
cense or certify both the social and health care model. 
While the study did not go into depth about monitor¬ 
ing and enforcement of standards, it concluded that 
oversight of standards was minimal. 

A survey of day care facilities completed by NIAD 
in 1986 reported on the extent to which facilities were 
either licensed or certified. 22 Of a total number of 
about 800 responses by facilities to a question about 
licensing, 57 percent of the facilities (459) indicated 
that they had at least one license. Of about 670 re¬ 
sponses as to certification of centers, about half were 
not certified. 


*° Intergovernmental Health Policy Project, State Regulation of Adult Day- 
Health Care Facilities (May 1989). 

21 Seven States used standards for certification of facilities for reimburse¬ 

ment. usually Medicaid. .Another sis States were found to use standards to 
determine eligibility for particular funding sources, but these standards were 
generally less stringent than certification s t a nd a r ds. In addition, certification 
procedures generally included on-site compliance review. __ 

22 Sl.\D~ Adult Day Care in America: Summary of a Sational Survey (Oc¬ 
tober 1986). Licensure usually signifies that a facility has met a certain de¬ 
fined set of standards. Certification signifies that a facility meets certain 
standards makin g it eligible for reimbursement of specific program funds. 


The Medicare Catastrophic Coverage Act of 1988 
requires HHS to conduct a study of adult day health 
services. Among other things, the study is to collect 
information on the characteristics of entities providing 
services and licensure, certification, and other quality 
standards that are applied to providers. The Secretary 
of HHS is required to make recommendations con¬ 
cerning appropriate standards for coverage of adult 
day care services under Medicare, including qualifica¬ 
tions of providers. The study is to be completed by 
July 1, 1990. 


Voluntary’ Organizations 

Adult day programs have experienced tremendous 
growth since the program concept was the subject of 
research and demonstration initiatives supported by 
DHHS in the early 1970s. In order to provide assist¬ 
ance to States in this developing field, the National 
Institute on Adult Day Care (NIAD) of the National 
Council on Aging (NCOA) published national stand¬ 
ards for adult day care in 1984. The purpose of the 
standards was to serve as guidelines for the implemen¬ 
tation of quality centers and to provide national direc¬ 
tion for policy formation related to centers. The 
standards address issues related to target population, 
administrative structure and organization, staffing, es¬ 
sential services, facility, and evaluation. 23 

These standards are used as a model for the devel¬ 
opment and implementation of day care programs. 
NIAD does not currently accredit any individual day 
care programs. There has been some interest on the 
part of day care advocates to stimulate a national ac¬ 
creditation process. 


Board and Care Facilities 

Board and care is a generic term referring to a 
wide range of community-based nonmedical residen¬ 
tial care facilities that provide room, board, and pro¬ 
tective oversight to the elderly and disabled. Various 
terms may be used to describe this service, including 
domiciliary homes, adult care homes, foster care 
homes, and personal care homes. In addition to room 
and board, residents of such homes may receive assist¬ 
ance with activities of daily living as well as other as¬ 
sistance, such as supervision of medication and money 
management. 


22 National Council on the Aging. Inc., National Institute on Adult 
Daycare. Standards for Adult Day Care (fall 1984). 


169 





A recent review of board and care by the General 
Accounting Office (GAO) indicated that the total 
number of board and care homes is unknown. 24 A 
1987 survey of board and care indicated that there 
were about 41,000 licensed homes with about 563,000 
beds. GAO indicated that this represents an un¬ 
dercount since there is an unknown number of unli¬ 
censed facilities. An analysis completed by the House 
Select Committee on Aging estimated that number of 
unlicensed homes may be over 28,000. This analysis 
estimated that licensed and unlicensed homes serve 
over 1 million elderly and disabled persons. 25 

Board and care homes receive funding for care 
they provide directly from residents who pay opera¬ 
tors with income received through social security, 
Federal and State payments under SSI program, and 
other income. However, the GAO analysis indicated 
that the board and home care population includes 
many who rely primarily on SSI income to pay for 
their care. A 1983 survey of 2,933 residents of li¬ 
censed and unlicensed board and care homes in 7 
States indicated that mentally retarded and mentally 
ill residents were more likely to receive SSI than el¬ 
derly residents. Elderly persons were more likely than 
the other groups to receive social security income. 26 

Assuring quality of care in board and care settings 
has proven difficult in part due to the lack of national 
standards and ineffective monitoring of facilities. De¬ 
spite oversight responsibilities cited in Federal law 
discussed below, regulatory responsibility resides with 
States. GAO and the House Select Committee on 
Aging have cited serious problems in quality of care 
and resident abuse. 27 


Federal Requirements 

Supplemental Security Income Program —The only 
major Federal requirement related to quality assur¬ 
ance for board and care facilities is found under SSI 
program requirements. Section 1616(e) of the Social 
Security Act (otherwise referred to as the Keys 
amendment after its author) requires States to estab¬ 
lish, maintain, and enforce standards for group living 
arrangements in which a significant number of SSI re¬ 
cipients reside. Standards must be appropriate to the 
needs of recipients and the type of facility and cover 
areas such as admission policies, safety, sanitation, and 


24 General Accounting Office, Board and Care. Insufficient Assurances That 
Residents' Needs Are Identified and Met (GAO/HRD, February 1989). (Here¬ 
after cited as Board and Care.) 

25 U.S. Congress, House Select Committee on Aging, Board and Care 
Homes in America: A National Tragedy, House Report No. 101-711, 101st 
Cong., 1st sess., March 1989, 9. (Hereafter cited as Board and Care Homes in 
America.) 

26 Board and Care, 15. 

27 See footnotes 24 and 25 for references. 


protection of civil rights. The State is further required 
to annually certify to the Secretary of HHS compli¬ 
ance with these provisions. The law stipulates that 
SSI payments to individuals will be reduced if board 
and care facilities are not approved according to the 
State standards. 

Many have concluded that the Keys amendment is 
unenforceable. For example, neither the law nor Fed¬ 
eral regulations define what is a “significant number” 
of SSI recipients. In addition, the sanction the law im¬ 
poses for noncompliance by States penalizes SSI re¬ 
cipients. The sanction is not directed at penalizing 
States who do not approve facilities according to es¬ 
tablished standards, or board and care operators who 
may be offering substandard care. 

GAO has indicated that HHS review of State com¬ 
pliance with the Keys amendment is minimal. The 
Office of Human Development Services (OHDS), 
which has been given responsibility for oversight of 
State compliance, commits one-eighth of one person’s 
time to reviewing State certifications and summaries 
of standards. 28 

Older Americans Act —As discussed earlier under 
Federal nursing home requirements, the Older Ameri¬ 
cans Act requires that the ombudsman program inves¬ 
tigate and resolve complaints of residents of board 
and care facilities and other adult care homes. There 
is little evaluative data on the impact of the ombuds¬ 
man program on the board and care industry. 

GAO reported that AoA’s role in the ombudsman 
oversight of board and care is limited and that AoA 
allows great discretion to States in implementation of 
the program. The 1987 amendments to the Older 
Americans Act required that the Commissioner on 
Aging conduct a study of the impact of the ombuds¬ 
man program on board and care facilities and other 
similar adult care homes. The study is to be submitted 
to Congress by December 31, 1989. 


State Requirements 

The most common means by which States oversee 
care provided in board and care facilities are licensing 
requirements and oversight responsibilities of the 
State ombudsman program authorized under the 
Older Americans Act. Both the GAO report and the 
House Select Committee on Aging analysis indicated 
that neither of these have been effective in assuring 
quality of care and preventing abuse of residents. 


28 Board and Care, 35. 


170 




The House Select Committee on Aging survey 
found that all but 10 States have licensing require¬ 
ments which vary significantly by State. Enforcement 
of licensing requirements also varies greatly. The 
large estimated number of unlicensed homes indicates 
that a licensure requirement alone is insufficient in 
order to assure quality and that adequate staff to en¬ 
force licensure requirements is also necessary. 

State licensure requirements generally establish cri¬ 
teria for the minimum number of residents per home, 
ranging from 1 to 21 residents, and specify the types 
of services to be provided residents. GAO indicated 
in its review of six State licensure policies that most 
requirements focus on physical plant; only one State 
included social evaluations through resident inter¬ 
views. GAO further indicated that States have diffi¬ 
culty in imposing sanctions against poor quality 
homes. Sanctions available in the six States were au¬ 
thority to close homes or suspend licenses. Three 
States imposed intermediate sanctions, such as fmes or 
receivership. Two States indicated that imposition of 
fmes was not an effective deterrent to substandard 
care. 

Board and care facilities were included under the 
oversight responsibilities of State ombudsman pro¬ 
grams in the 1981 amendments to the Older Ameri¬ 
cans Act. State agencies on aging are required to 
assure that ombudsmen have access to facilities and 
patient records. An analysis of 38 State statutes per¬ 
taining to the ombudsman program completed by the 
National Association of State Units on Aging 
(NASUA) in 1987 found 24 statutes specifically au¬ 
thorized ombudsman access to board and care facili¬ 
ties or personal care homes. 29 This number is slightly 
lower than the number of States reporting that they 
had oversight authority for such facilities in the 
House Select Committee on Aging analysis. That 


29 National Association of State Units on Aging, 5. 


study found that 43 States had oversight over board 
and care homes. 

Because of the large estimated number of licensed 
and unlicensed homes, it may be difficult for ombuds¬ 
men to investigate and resolve complaints from board 
and care residents. The House Select Committee on 
Aging survey of States indicated that investigation of 
complaints from board and care residents did not 
appear to be a priority for ombudsmen. As a national 
average only about 16 percent of ombudsman efforts 
were devoted to handling complaints from board and 
care residents. Only two States indicated that the om¬ 
budsman program has staff who work exclusively on 
board and care homes. Only 17 State ombudsmen 
queried indicated that the State system for regulating 
board and care homes is adequate. 30 GAO also con¬ 
cluded that the ombudsman efforts in board and care 
facilities are limited. 


Voluntary Organizations 

In 1984 the American Bar Association (ABA), 
under a grant from OHDS, published recommended 
standards for board and care homes, A Model Act 
Regulating Board and Care Homes: Guidelines for 
States. In part, the purpose of the guidelines was to 
develop a statutory scheme for licensing board and 
care homes to ensure a safe and decent environment 
for the elderly and disabled and to establish standards 
for regulating such homes. Among other things, the 
model act covers the following items: definition of 
board and care homes; recommended size limitations; 
delegation of rulemaking, adjudicative, and investiga¬ 
tive authorities; resident plan of care requirements; 
admission policies; resident rights; staffing and physi¬ 
cal environment requirements; licensure requirements; 
procedures for inspections and investigation of homes; 
and sanctions and penalties. 


30 Board and Care Homes in America, 146, 160, and 179. 


171 


























































































■ 



















DUE PROCESS: REVIEW AND APPEAL PROCEDURES 

IN LONG-TERM CARE 


Jane Handler Yurow * 


EXECUTIVE SUMMARY 

The United States Constitution requires federally fi¬ 
nanced or administered benefit programs (benefit pro¬ 
grams) to provide for review and appeal of decisions 
adverse to applicants, beneficiaries and claimants 
(beneficiaries), in accordance with constitutional 
standards of due process of law. 

A new federal long-term care benefit program 
(long-term care program) will need to include review 
and appeal procedures integral to and appropriate for 
the goals of the program itself. 

The review and appeal procedures in existing bene¬ 
fit programs demonstrate the complexity of the 
process and the difficulties in integrating program 
considerations with achieving due process goals. 
Medicare, Social Security Disability Insurance and 
Supplemental Security Income, and Department of 
Veterans Affairs Disability Compensation and Pension 
programs provide a wealth of experience on which 
policymakers can draw in designing a review and 
appeal process for a long-term program. 

Although many policy considerations are common 
to benefit programs generally, a long-term care pro¬ 
gram will also have particular characteristics that will 
influence the development of its review and appeal 
procedures. These include: 

• focus on chronic as well as acute care problems 

• emphasis on provision of social and custodial 
services rather than medical care 

• involvement of the family or other informal care¬ 
takers in decisionmaking about appropriate care 


* Prepared for the United States Bipartisan Commission on Comprehensive 
Health Care (The Pepper Commission), March 22, 1990. 


• need for frequent reassessment of care plans to 
respond to changing service needs 

• the central role of the case manager, with loyal¬ 
ties to both the beneficiary and the benefit pro¬ 
gram, in developing and monitoring care plans 

Review and appeal procedures of existing benefit 
programs are too complex to be understood by most 
individuals. A long-term care program might establish 
simpler procedures. To the extent possible, these 
should be readily understandable to physically frail, 
mentally ill or cognitively impaired individuals or 
their caretakers. 

Specific lessons that can be drawn from the experi¬ 
ence of existing benefit programs and their implica¬ 
tions for a long-term care program follow. 

Type of benefit, sources of financing and structure of 
administration of benefit programs. —Initial determina¬ 
tions as to eligibility for disability benefits with peri¬ 
odic payments over the long term are more amenable 
to due process review than determinations as to pay¬ 
ment for acute care often made quickly and based on 
inadequate information. A long-term care program, 
addressing both acute and chronic care needs in the 
same individual, often at the same time, requires 
procedures sensitive to these differing program 
considerations. 

Benefit programs may have differing due process 
requirements depending on their source of financing 
and type of administration—federal, federal-state, or 
federal-private. Decisions made about the financing 
and administration of the long-term care program 
itself, will influence the design of its review and 
appeal process. 


173 



Cost containment and placing risk. —Benefit pro¬ 
grams chronically strapped for funds sometimes resort 
to cost-cutting shortcuts in their review and appeal 
procedures. Some of these may be unconstitutional, 
particularly if they result in depriving beneficiaries of 
access to these procedures. 

In a long-term care program, where beneficiaries 
develop relationships of trust with service providers, 
cost containment measures may jeopardize these rela¬ 
tionships. Where providers bear the risk for providing 
services not covered by a benefit program, tension 
may develop between the provider and the benefici¬ 
ary. This might be mitigated if the benefit program 
could make coverage decisions prior to the provision 
of services. 

Representation by lawyers or lay advocates. —Repre¬ 
sentation substantially increases the likelihood that 
beneficiaries will prevail in review and appeal pro¬ 
ceedings. Currently, the supply of trained beneficiary 
representatives is far short of the demand for their 
services. 

Because of the greatly increased number of public 
benefit recipients engendered by a long-term care 
program, policymakers need to consider supporting 
programs to train and compensate legal and lay advo¬ 
cates to represent beneficiaries both in existing and 
new benefit programs. The use of trained lay ad¬ 
vocates supervised by attorneys may be particularly 
effective. 

Adequate notice and timely decisions. —Inadequate in¬ 
formation in notices limits beneficiaries in planning 
their reviews and appeals. Extended time periods for 
decisionmaking often deprive frail, low-income benefi¬ 
ciaries of basic resources. Benefit programs have been 
criticized on both counts. A long-term care program 
needs to insure adequate staff and resources for proc¬ 
essing claims, reviews and appeals expeditiously. The 
development of adequate notice language is usually 
evolutionary in a benefit program, but program 
administrators should be sensitive to its importance. 

Access to information critical to decisions. —Benefit 
programs generally communicate significant informa¬ 
tion relating to claims decisions through limited circu¬ 
lation manuals, directives or informal contacts rather 
than publishing them in the Federal Register. This re¬ 
stricts beneficiaries’ access to information that may 
be critical to effective challenges of claims-related 
decisions. 

In a long-term care program, many decisions will 
involve subtle changes in care plans, often based on 


informal discussions with beneficiaries or caretakers. 
Administrators of this type of program have as much 
responsibility as in more formally structured benefit 
programs to provide protesting beneficiaries with 
access to critical information. 

Decisions based on an adequate record. —Benefit pro¬ 
grams not providing the resources or trained staff 
necessary to develop claims files containing all 
relevant evidence are countenancing inadequate deter¬ 
minations of initial claims. This results in: unfair deci¬ 
sions that, for various reasons, are never appealed; 
delays in the review and appeal process in order to 
collect information that should already be in the 
claims file; or requiring appellate level adjudicators to 
perform functions more appropriately performed by 
others. 

In a long-term care program, most claims informa¬ 
tion will not be medical, and so conditions may be 
less amenable to technical description or precise meas¬ 
urement than in existing benefit programs. Long-term 
care programs will need to make specific provisions, 
including setting standards, for developing and moni¬ 
toring adequate claims files. 

Verbal statements in front of decisionmaker. —Experi¬ 
ence of benefit programs indicates that beneficiaries 
receiving some sort of face-to-face meeting with 
decisionmakers are significantly more likely to prevail 
than those receiving paper-based determinations. But 
most benefit programs discourage face-to-face meet¬ 
ings with decisionmakers until a late stage of the 
review and appeal process. 

The face-to-face hearing is likely to be particularly 
important in a long-term care program where benefi¬ 
ciaries and caretakers will participate with case man¬ 
agers—the initial decisionmakers—in developing, 
monitoring and modifying care plans. Telephone hear¬ 
ings may not be an effective alternative to face-to-face 
reviews for the long-term care population because 
many of these individuals suffer from hearing loss or 
confusion. 

Hearing prior to denial or termination of benefit .— 
When termination of benefits or services critical to 
life are at issue, beneficiaries may be entitled to some 
sort of prior review and appeal. Beneficiaries of a 
long-term care program may be poor or mentally or 
physically vulnerable. Premature deprivation of sup¬ 
port, particularly for those beneficiaries living in the 
community, could be devastating. Because changes in 
a care plan are more likely in a long-term care pro¬ 
gram than total termination from the program, it is 


174 


particularly important to designate the types of 
changes that require prior review. 

Decision by an impartial individual or panel.— Deci¬ 
sionmaking independent of benefit program influence 
is a critical goal of due process. Existing benefit pro¬ 
grams have sometimes had difficulty in achieving this. 
Because the initial claims-related decisions in a long¬ 
term care program are likely to be made by case 
managers, directly or indirectly funded by, and re¬ 
sponsible to, the benefit program, long-term care leg¬ 
islation needs to establish objective procedures for 
review and appeal of these initial decisions. 


ORGANIZATION OF REPORT 

This report is organized as follows: 

• A discussion of the constitutional and legal re¬ 
quirements of due process of law in review and 
appeal of claims made by applicants or benefici¬ 
aries of federal social insurance or entitlement 
programs (I—III) 

• Brief descriptions of the claims review and 
appeal procedures of specific federally financed 
health care or disability benefit programs—Medi¬ 
care, Social Security, and Department of Veter¬ 
ans Affairs (IV) 

• A discussion of basic program considerations that 
have influenced the design of review and appeal 
procedures in benefit programs, and of the 
particular characteristics of a long-term care pro¬ 
gram that need to be addressed in developing ap¬ 
propriate review and appeal procedures (V) 

• An analysis of the experiences of Medicare, 
Social Security, and the Department of Veterans 
Affairs in developing and administering review 
and appeal procedures intended to comply with 
constitutional due process (VI) 

• A summary of significant lessons learned from 
the experiences of these programs, and the impli¬ 
cations of these lessons for a new, federally fi¬ 
nanced long-term care program (VII) 

• A review of selected programs providing advo¬ 
cacy, assistance, information, or other services 
that assist beneficiaries of federally funded benefit 
programs effectively to assert their due process 
rights, with a view toward identifying ways to 
deliver similar services to beneficiaries of a new 
federally financed long-term care program (VIII) 



TABLE OF ACRONYMS 

ADL — 

Activity of Daily Living 

ALJ — 

Administrative Law Judge 

BVA — 

Board of Veterans Appeals 

CPS — 

Compensation and Pension Service 

DDS — 

Disability Determination Service 

DI — 

Disability Insurance 

DRG — 

Diagnosis Related Group 

DVA — 

Department of Veterans Affairs 

HHA — 

Home Health Agency 

HHS — 

Department of Health and Human 


Services 

HMO — 

Health Maintenance Organization 

NDG — 

Network Design Group 

PRO — 

Peer Review Organization 

SSA — 

Social Security Administration 

SNF — 

Skilled Nursing Facility 

SSI — 

Supplemental Security Income 


INTRODUCTION 

Legislative proposals for establishing a federal long¬ 
term care benefit program (long-term care program) 
are likely to include procedures for review and appeal 
when individuals are denied benefits to which they 
consider themselves entitled. The design of an effec¬ 
tive review and appeal process for this program will 
be an additional challenge to policymakers. 


Existing Benefit Programs 

The experiences of federally financed or adminis¬ 
tered health care related programs (benefit programs) 
with review and appeal procedures provide significant 
lessons for the design and implementation of similar 
procedures for a new long-term care program. This 
report focuses on review and appeal procedures avail¬ 
able to applicants and beneficiaries (beneficiaries), 
except when the interests of service providers and 
beneficiaries cannot be separated. Although the analy¬ 
sis often focuses on certain difficulties benefit pro¬ 
grams may have in meeting constitutional due process 
expectations, it is not intended as a criticism of the 
review and appeal process in these programs. 

The purpose of the report is to understand the 
problems existing programs have encountered in pro¬ 
viding due process in reviews and appeals, in order to 
use the experiences of these programs as guidance to 
policymakers in designing similar procedures for a 


175 


new federal long-term care benefit program. Several 
types of benefit program determinations could be ad¬ 
verse to a beneficiary’s interest. In describing the 
practices of existing benefit programs, this report fo¬ 
cuses on two of these: 

• The initial determination that a beneficiary does 
not have a medical condition that qualifies 
her/him for program benefits or payment for a 
specific course of treatment or level of care; 

• The decision to terminate a beneficiary from the 
program or to cease payment for a course of 
treatment or level of care because her/his medi¬ 
cal condition no longer qualifies her/him for ben¬ 
efit or payment. 

Most beneficiary appeals involve these questions. 1 

Particular Characteristics of a 
Long-Term Care Program 

The application to a long-term care program of 
review and appeal procedures used in existing benefit 
programs will require imagination and flexibility. 
Characteristics of a long-term care program that make 
it distinct from these programs are its focus on: 

• chronic as well as acute care needs 

• custodial and social services rather than medical 
care 

• involvement of family or other informal care¬ 
takers in decisionmaking about appropriate care 

• the need for frequent reassessment of care plans 
to respond to changing service needs 

• the central role of the case manager, with loyal¬ 
ties to both the beneficiary and the benefit pro¬ 
gram, in developing and monitoring care plans 


WHY WOULD A NEW FEDERAL 
LONG-TERM CARE PROGRAM 
BE REQUIRED TO PROVIDE 
REVIEW AND APPEAL PROCEDURES 
FOR BENEFICIARIES AND 
APPLICANTS? 

The U.S. Constitution (Amendments 5 and 14) pro¬ 
hibits the government from taking a person’s life, 
liberty or property without following certain legal 
procedures designed to ensure that the government’s 
action is fair and impartial. These procedures are in¬ 


1 Eleanor Kinney, “The Medicare Appeals System for Coverage and Pay¬ 
ment Disputes: Achieving Fairness in a Time of Constraint,” The Administra¬ 
tive Law Journal, 1,(1) (1987): 69. 


tended to protect citizens from arbitrary government 
conduct. The nature of and requirements for these 
legal procedures, called procedural due process, have 
evolved through litigation and legislation. 

Federally financed or administered programs pro¬ 
viding benefits or other payments to individual benefi¬ 
ciaries or claimants are subject to constitutional due 
process. Statutory and regulatory provisions in these 
programs establish review and appeal procedures in¬ 
tended to meet constitutional standards. 

For a new long-term care program the issue is not 
whether to adopt review and appeal procedures but 
what sort of procedures are appropriate. The develop¬ 
ment of appropriate review and appeal procedures is 
integrally related to the design and operation of the 
long-term care program itself. 

On the one hand, beneficiaries are more likely to 
perceive a benefit program’s review and appeal proc¬ 
ess as fair if they consider the administration of the 
program itself to be fair. A program that raises false 
expectations among beneficiaries and providers of 
service, or communicates its goals and limitations in¬ 
effectively, may cause needless confusion among 
beneficiaries as to their entitlements. The result could 
be increased resort to the review and appeal process 
for clarification of entitlements. This, in turn, could 
raise the cost of program administration significantly. 

On the other hand, the effectiveness of the review 
and appeal process could have major implications for 
the ongoing success of the benefit program. If benefi¬ 
ciaries do not consider the decisions on review to be 
fair, they might harbor mistrust for the program, pro¬ 
viders or the federal government more generally. 
Beneficiary mistrust can become costly to a program 
that exhibits a pattern of decisionmaking perceived as 
unfair. 

If significant numbers of beneficiaries complain to 
their legislators that a program’s claims, review or 
appeal determinations are unfair, Congress is likely to 
investigate these practices. Also, groups of benefici¬ 
aries with similar complaints may institute class ac¬ 
tions against the program in federal court in an effort 
to force change in its practices. The financial and 
public relations cost to the program of these actions 
could be substantial. 


176 



WHAT ARE THE COMPONENTS OF A 
REVIEW AND APPEAL PROCEDURE 
THAT MEETS DUE PROCESS 
REQUIREMENTS? 

All benefit program review and appeal procedures 
must meet certain minimal legal requirements but not 
necessarily in the same manner or degree. The goal of 
a due process review is to ensure that the person who 
has been, or may be, denied a benefit has “the oppor¬ 
tunity to be heard” 2 regarding his reasons as to why 
he should not have been so denied. But the concept 
of a due process review is complicated. 


Basic Components 

Certain basic components are considered essential 
to a due process determination on the issues of denial 
or termination of eligibility from a benefit program or 
of benefits under a program. The formulation of a 
prominent administrative law scholar includes: 

• timely and adequate notice to the beneficiary of 
denial, reasons for denial, the right to review or 
hearing and the issues to be presented 

• opportunity for the beneficiary to make an oral 
statement or argument, and to present evidence 
and witnesses 

• opportunity for the beneficiary to confront and 
cross-examine witnesses 

• full disclosure by the government of all relevant 
evidence 

• right of beneficiary to be represented by counsel 
and for compensation of counsel, if indigent 

• right to a decision based on the record 

• a statement of findings of fact and reasons for 
decision 

• an impartial hearing officer. 3 

There are a variety of legally permissible ap¬ 
proaches to achieving due process in administrative 
procedures. The variations often have a historical or 
political basis, or are the outgrowth of differing mech¬ 
anisms for financing or administering the programs. 
Where the beneficiary’s interest in obtaining certain 
due process protections conflicts with the public in¬ 
terest in limiting these protections, a balancing of 
interests is required. The factors to be considered in 
balancing private versus public interests are: 


2 Grannis v. Ordean, 234 U.S. 385, 394 (1914). 

3 See Kenneth Culp Davis, Administrative Law of the '70’s (Rochester, NY: 
The Lawyers Coop Publishing Co., 1976): 242. 


First, the private interest that will be affected 
by the official action; second, the risk of an erro¬ 
neous deprivation of such interest through the 
procedures used, and the probable value, if any, 
of additional or substitute procedural safeguards; 
and finally, the Government’s interest, including 
the function involved and the fiscal and adminis¬ 
trative burdens that the additional or substitute 
procedural requirement would entail. 4 


Due Process in Practice 

Welfare programs financed from general revenues 
may be required to observe stricter due process stand¬ 
ards than social insurance programs because of the 
total destitution of welfare recipients. 5 Where, how¬ 
ever, vulnerable populations, such as low income, ill, 
elderly individuals, are permanently denied payment 
by a federally supported insurance program for medi¬ 
cal expenses to which they consider themselves enti¬ 
tled, some courts have said that government must 
provide them with substantial due process. 6 From 
time to time, Congress has enacted legislation de¬ 
signed to correct the perceived systemic failure of 
certain benefit programs to provide beneficiaries with 
sufficient procedural due process. Two examples are: 

• the requirement that the Department of Health 
and Human Services offer beneficiaries an oppor¬ 
tunity for a hearing before an administrative law 
judge on appeal from denials of Medicare claims 
by private insurance carriers; 7 and 

• the creation of an independent Court of Veterans 
Appeals to review final denials of disability bene¬ 
fits by the Board of Veterans Appeals in the De¬ 
partment of Veterans Affairs. 8 


WHAT ARE THE REVIEW AND 
APPEAL PROCEDURES OF EXISTING 
FEDERALLY FINANCED OR 
ADMINISTERED HEALTH-RELATED 
BENEFIT PROGRAMS? 

This section describes briefly the review and appeal 
procedures of certain benefit programs. These are: 

• Medicare—hospital insurance, supplementary 
medical insurance, and prepaid health care; 


4 Mathews v. Eldridge, 424 U.S. 319, 335 (1975). 

5 Mathews v. Eldridge 424 U.S. 319 (1975), Goldberg v. Kelly. 397 U.S. 259 
(1969). 

6 Gray Panthers v. Schweiker, 652 F.2d 146 (1981); Fox v. Bowen, 656 
F.Supp. 1236 (DCT, 1980); Martinez v. Bowen, 655 F.Supp. 95 (DNM, 1986). 

M2 U.S.C., Sec. 1395ft 

8 Veterans Judicial Review Act, P.L. No. 100-687. 


177 




• Social Security Administration (SSA)—disability 
insurance and supplementary security income; 

• Department of Veterans Affairs (DVA)—disabil¬ 
ity allowance and disability pension. 

The two SSA programs use the same review and 
appeal procedure, as do the two DVA programs. 
Each of the three Medicare programs uses a different 
set of procedures. All of the benefit programs provide 
similar stages for review and appeal. These include: 
an initial determination by the benefit program or its 
designee; a reconsideration by the program or its des¬ 
ignee; an appeal to an administrative body or bodies 
within the agency not involved with ongoing benefit 
program determinations; and a further appeal to a fed¬ 
eral court. The type of mechanism used at each stage 
varies considerably among programs, as do many pro¬ 
gram practices. 

This section also identifies the federal criteria for 
review and appeal procedures that states must meet in 
order to receive federal Medicaid funding. The Med¬ 
icaid program is not included, however, in the more 
detailed analysis of program practices in other sec¬ 
tions of this report. 

Finally, this section describes review and appeal 
procedures of two private insurance companies offer¬ 
ing group long-term care insurance with a managed 
care component. Private companies have no constitu¬ 
tional obligation to provide due process review and 
appeal procedures. Any legal requirements would be 
based in state law. The private insurance company 
programs are: 

• ORS LTC Aetna Long-Term Care 

• The Travelers Long Term Care Plan with Case 
Management 


Medicare 

Medicare 9 is a national health insurance program 
for persons 65 years and over and certain categories 
of disabled persons. Medicare is administered by the 
Department of Health and Human Services (HHS) 
through the Health Care Financing Administration 
(HCFA). 

Medicare delegates a substantial portion of both 
program administration and review functions to 
various private sector organizations. These include in¬ 
surance companies acting either as the recipients of 
hospital, nursing home or home care claims (fiscal 


9 Social Security Act, Title XVIII, 42 U.S.C., Sec. 1395, et seq., and Title 

XI, 42 U.S.C., Sec. 1320c, et seq. 


intermediaries) for the Part A compulsory participa¬ 
tion program or as the initial claims processors (car¬ 
riers) for the Part B voluntary insurance program. In 
addition, organizations of physicians, Peer Review 
Organizations (PROs) and Health Maintenance Orga¬ 
nizations (HMOs) are engaged in processing and re¬ 
viewing claims as part of the Medicare program. 

Medicare Hospital Insurance (Part A)—This pro¬ 
gram is financed by contributions of employees and 
employers to Social Security earmarked for Medicare. 
It functions like an insurance program, making pay¬ 
ments for inpatient hospital care, skilled nursing facil¬ 
ity care, home health care, and hospice care. In FY 
1989, 29.4 million aged and 3.2 million disabled per¬ 
sons were protected under part A. Of these, 6.7 mil¬ 
lion older persons and .8 million disabled persons 
actually received reimbursed services. 10 * Medicare 
Part A has a different review and appeal procedure 
for determinations about medical necessity and appro¬ 
priateness of care in hospitals than for all other 
claims. These review procedures are particularly com¬ 
plicated and cannot readily be described in summary 
form. 11 Within the category of hospital claims, pre¬ 
admission screening claims are handled somewhat dif¬ 
ferently than in-patient claims. The bulk of other 
claims involve services of a skilled nursing facility 
(SNF) or a home health agency (HHA). 

Descriptions of review and appeal procedures in 
these three situations follows. 

Hospital Claims Requiring Medical Determinations 
for Pre-Admission Screening —Any decision should be 
totally based on the medical needs of the beneficiary. 

In the case of elective or nonemergency surgery 
the hospital may notify the beneficiary that in the hos¬ 
pital’s opinion Medicare will not pay for the surgery. 

The beneficiary may request a written statement of 
the hospital’s opinion. 

The beneficiary should notify the PRO, a private 
organization of physicians that has a contract with 
HCFA, as soon as she/he receives notice. The PRO 
has three working days to respond to request. 

If the PRO agrees that admission will not be cov¬ 
ered, the PRO’S decision is a Medicare denial and 


10 House Committee on Ways and Means, Background Material and Data 
on Programs within the Jurisdiction of the Committee on Ways and Means. 101st 
Cong., 1st Sess., 1989, Committee Print 4, 127. 

11 See AARP, Medicare’s Prospective Payment System. Knowing Your Rights 
(Washington D.C.: Revised 1988), for an excellent description of these 
procedures. 


178 




its notice must advise the beneficiary of right to 
reconsideration. 

The PRO may notify the beneficiary that Medicare 
will not pay for elective surgery. This notice must 
contain: reasons for denial, right to expedited recon¬ 
sideration, how to request reconsideration, and that 
beneficiary can submit additional evidence. 

The beneficiary must request reconsideration within 
three calendar days of receiving notice. 

If, on reconsideration, the PRO denies or partially 
denies a claim, the notice must state: the basis for the 
decision, and description of further appeal rights. No 
face-to-face hearing is required. 

Hospital Claims Requiring Medical Determinations 
For Hospital Inpatient Beneficiaries —When the benefi¬ 
ciary enters the hospital, the hospital must give 
her/him a statement of rights to review and appeal 
under Medicare. 

If the hospital or physician determines that the 
beneficiary’s stay is no longer medically necessary or 
that the beneficiary requires a different level of care, 
the hospital or physician informs the beneficiary that 
there will be no Medicare coverage after three days. 

If the beneficiary is informed orally, disagrees with 
this decision and remains in the hospital, she/he may 
ask the hospital for written notice of its decision. 

If the doctor has agreed with the hospital the writ¬ 
ten notification must come from the hospital. The 
beneficiary may request the PRO, to review the hos¬ 
pital’s decision. If the PRO agrees with the hospital, 
the PRO’S notice to the beneficiary is a Medicare 
notice of noncoverage or initial denial determination. 

Upon receiving notice, the beneficiary has until 
noon of the next working day to request PRO 
reconsideration. 

The PRO must consider the case within one work¬ 
day after getting a request. The PRO must solicit the 
beneficiary’s views and examine the medical record. 
No face-to-face hearing is required. 

The PRO must send the beneficiary, doctor and 
hospital its decision within the next full workday after 
receiving the request for review and the hospital s 
records. One day after receiving the initial denial de¬ 
termination, the beneficiary may be charged for the 
remaining hospital stay. 


Decision must include notice of appeal rights. 

If doctor has disagreed with the hospital the hospi¬ 
tal must tell the beneficiary it is requesting a decision 
from the PRO which must directly inquire of the 
beneficiary about his condition prior to making a 
decision. 

If the PRO agrees with the hospital, both the PRO 
and the hospital must send the beneficiary a Medicare 
notice of noncoverage. 

The beneficiary may request an expedited reconsid¬ 
eration from the PRO by calling the PRO as quickly 
as possible. 

The PRO has three workdays from the date of 
sending the beneficiary the notice of noncoverage to 
make a reconsideration decision. No face-to-face hear¬ 
ing is required. If the PRO denies the claim, the 
beneficiary may be charged for the remaining days of 
her/his hospital stay. 

The decision must include notice of appeal rights. 

In both of the above situations if the amount in 
controversy is at least $200, the beneficiary may re¬ 
quest a de novo face-to-face hearing before an SSA 
Administrative Law Judge (ALJ). The beneficiary 
may be represented. 

If the claim is denied, the SSA Appeal Councils 
may review the claim at the beneficiary’s request or 
on its own initiative, and either decide or dismiss the 
case. 

After Appeals Council action, any party may 
request a hearing in U.S. District Court, if the 
amount in issue is at least $2,000. The parties may be 
represented. 

Skilled Nursing Facility and Home Health Agency 
Claims —For all claims other than hospital claims re¬ 
quiring medical determinations if the service provider 
decides that the service is not medically necessary or 
that skilled care is inappropriate for the beneficiary, 
either prior to providing service initially or before 
terminating an ongoing service (the more usual situa¬ 
tion) the service provider (SNF or HHA) must: 

• notify the beneficiary in writing that it does not 
believe that the service or confinement is covered 
by Medicare; 


179 


• inform the beneficiary that she/he can request a 
Medicare determination of whether or not the 
service or confinement is covered; 

• submit the claim to the insurance company serv¬ 
ing as fiscal intermediary on behalf of the benefi¬ 
ciary stating that it believes that Medicare will 
not cover the confinement or service (a no-pay¬ 
ment claim). (SNFs may not bill a beneficiary 
prior to the fiscal intermediary’s initial decision; 
HHAs may do so.) 

If the service provider decides that Medicare is 
likely to pay the claim, it must submit a claim for 
payment on behalf of the beneficiary to the fiscal 
intermediary to determine whether or not the service 
or confinement is covered by Medicare. If the fiscal 
intermediary denies the claim, it must send a denial 
notice to the beneficiary indicating her/his right to re¬ 
quest reconsideration by the fiscal intermediary. 

If the reconsideration is a denial, the fiscal 
intermediary must notify the beneficiary of the deci¬ 
sion in writing indicating further appeal rights. A 
face-to-face hearing is not required. 

If the amount in controversy is at least $100, the 
beneficiary may request a face-to-face de novo hearing 
before an SSA ALJ. 

The beneficiary may be represented. 

The beneficiary may request a review by the SSA 
Appeals Council or the Council may review the case 
on its own initiative. This generally is an on-the- 
record review. 

After action by Appeals Council, all parties may re¬ 
quest a hearing in the U.S. District Court, if the 
amount in controversy is at least $1,000. The parties 
may be represented. 

In a recent 24 to 36 month period, there were 
6,655,505 denials of continued hospital care reviewed 
by PROs. Four percent or 278,294 of these reviews 
resulted in denial of coverage. The PROs recon¬ 
sidered 33 percent of the denials, or 91,268 cases, and 
reversed 44 percent of these, or 40,016. 12 

In FY 89, there were 75,620,079 claims filed for 
Part A Nursing Home and Home Health Care bene¬ 
fits. Of these, 3,882,546 were denied. There were 
40,001 reconsiderations of which 47 percent were re¬ 
versals of initial decisions. ALJ proceedings were 


12 Richard Husk, Director, Office of Peer Review, Health Quality Stand¬ 
ards Bureau, Health Care Financing Administration, conversation with 
author (Baltimore, Md.: November 17, 1989). 


held on 9,010 cases with a reversal rate of 81 
percent. 13 

Supplementary Medical Insurance (Part B)—Part B 
is voluntarily financed from premiums of elderly or 
disabled individuals or those with end-stage renal dis¬ 
ease who are enrolled in the program. In FY 1989, 
29.2 million aged and 2.9 million disabled individuals 
were enrolled in Part B. Over 23.6 million aged and 
2.3 million disabled individuals received Part B reim¬ 
bursed services. 14 

The beneficiary submits a claim to an insurance car¬ 
rier for initial determination. If the carrier denies the 
claim, it must send a written notice of the denial to 
the beneficiary stating the reasons for denial and in¬ 
forming the beneficiary of her/his right to have the 
determination reviewed. 

The beneficiary may request a review in writing 
with specific identification of reasons for appeal, and 
send the request to the carrier’s office or an SSA 
office. 

The review is conducted by the carrier, but by a 
different employee than the individual making the ini¬ 
tial determination. The beneficiary may submit writ¬ 
ten evidence and contentions of fact or law relative to 
the claim. The carrier may develop additional infor¬ 
mation. The review is on the record. 

If the carrier denies the claim, it must advise the 
beneficiary of the right to request a hearing, where 
the amount in controversy is $100 or more. It must 
also provide reasons for the denial. 

The beneficiary requests a hearing by the carrier at 
the carrier’s office or an SSA office. If all the parties 
waive personal appearance at the hearing, the carrier 
will make a determination based on an on-the-record 
review. 

The carrier must send a notice of hearing prior to 
the hearing that sets forth time and place, purpose, 
statement of issues, consequences of the hearing and 
the beneficiary’s rights. 

The hearing is de novo. The beneficiary may bring 
witnesses, make statements and present other evi¬ 
dence. The beneficiary may be represented by an at¬ 
torney or lay representative. 

If the carrier denies the claim, it must issue a writ¬ 
ten decision including a statement of law and regu- 

13 Intermediary Appeals Workload Report to Health Care Financing 
Administration, December 1989. 

14 Ways and Means, Background Material, 127. 


180 




lations, specific facts, and explanation of reasons for 
decision. The notice must inform the beneficiary of 
further appeal rights. 

The beneficiary may request a de novo hearing by 
an SSA ALJ if the value of the claim is $500 or more. 

All appeals are processed through a centralized 
unit, the Development Center, which prepares the 
record for the ALJ. Beneficiaries may request either 
an on-the-record review or a face-to-face hearing. 

All determinations are made by designated Part B 
ALJs. On-the-record determinations are made by a 
specific ALJ, and based on recommendations of the 
Development Center staff. 

The beneficiary may be represented at the ALJ 
hearing. 

If the claim is denied, the beneficiary may request a 
review by the Appeals Council of SSA which will 
either decide or dismiss the case. This is an on-the- 
record review. 

After Appeals Council action, any party may re¬ 
quest a hearing in a U.S. District Court, if the amount 
in controversy is at least $1,000. The parties may be 
represented. 

There were 410,678,568 Part B claims filed in FY 
89, 71,722,184 of which were denied. Of 6,075,507 re¬ 
views of initial denials, 57 percent were reversed. Of 
66,802 carrier fair hearings completed, 56 percent re¬ 
sulted in reversals. The ALJ made decisions in 436 
cases, 40 percent of which were reversals of fair hear¬ 
ing denials. 15 

Medicare Health Maintenance Organizations 
(HMOs)—HMOs provide comprehensive medical 
services to subscribers. Their mechanisms for assess¬ 
ing need and providing health services offer a model 
for service delivery that is closer to long-term care 
than any other type of benefit program. HMOs re¬ 
quire subscribers to pay a flat amount in advance of 
service, generally a monthly fee. HMOs contracting 
with Medicare on a risk basis must agree to provide 
covered services to Medicare beneficiaries for a pre¬ 
determined fixed amount per person. 16 This puts the 
HMOs at risk of financial loss if costs exceed Medi¬ 
care payments. In January 1988 there were 130 risk 
basis HMOs providing services to nearly one million 
Medicare beneficiaries. Because the HMO pays pro¬ 
viders of medical services directly, HCFA maintains 


15 “Carrier Appeals Workload Report to Health Care Financing Adminis¬ 
tration,” December 1989. 

18 42 U.S.C, Sec. 1395mm. 


no data on the number of individuals using outpatient 
services and only limited data on use of inpatient 
services. 

HCFA has contracted out to each HMO the func¬ 
tion of reviewing its own decisions as to whether 
disputed services are covered by the beneficiary’s 
contract with the HMO. HCFA provides minimal 
guidelines for the design of HMO review and appeal 
procedures and does not monitor HMO operations in 
this area. Consequently, HCFA maintains no data on 
the number of claims denied or the number of initial 
reviews conducted. 

The process by which the HMO determines 
whether or not a beneficiary may receive services and 
the review of HMO denials of service vary depending 
on the policies of the HMO. HMOs are subject to 
HCFA requirements regarding notice, right to recon¬ 
sideration, and right to present evidence in person or 
in writing. 

The HMO initial determination and review process 
described is that of U.S. Health Care. 17 

If the HMO denies a request for service, the benefi¬ 
ciary may file a grievance by telephone or in writing 
with the U.S. Health Care Member Relations Depart¬ 
ment (MRD). MRD does the initial investigation. If 
not resolved informally, the beneficiary or MRD may 
take her/his request to the grievance committee. 

The grievance committee has 30 days to act on the 
request. There are no set procedures; the committee 
focuses on finding solutions to the problem. 

If medical care is an issue in the request for service, 
the Medical Director of U.S. Health Care sends a 
letter to the beneficiary’s primary physician asking for 
his decision within a stated period of time. If a spe¬ 
cialist is necessary, she/he is asked to make a decision. 
Although this is not the case in all risk HMOs, at U.S. 
Health Care the primary physician and specialist are 
not employees of the HMO. (Although HCFA prefers 
that decisions are made by physicians or nurses, the 
HMOs are allowed to decide the credentials of 
decisionmakers.) 

After the physician makes a decision, the U.S. 
Health Care Grievance Review Board consults with 
the Medical Director. If the request for service is 
denied, the HMO sends a letter to the beneficiary stat¬ 
ing the decision, reasons for denial, and the right to a 
reconsideration. 


17 Mary Lonnergan, U.S. Health Care, telephone conversation with 
author, November 8, 1989. 


181 




If the beneficiary requests a reconsideration, ac¬ 
cording to HCFA directives the HMO must provide 
it. The beneficiary may file the request at the HMO 
or an SSA office. 

The reconsideration is to be based on the initial de¬ 
termination and any other evidence submitted by the 
parties or obtained by the HMO. The beneficiary may 
request a face-to-face hearing and be represented by 
an attorney or lay individual. 

If the HMO wishes to deny the request for service 
on reconsideration, the beneficiary’s file with indica¬ 
tion of how the HMO arrived at its decision 
must first be sent to HCFA for review. Network 
Design Group (NDG), a private contractor to 
HCFA, reviews all files, develops new information, 
and makes a determination. 

If the request for service is denied, the beneficiary 
may ask for a de novo face-to-face hearing or on-the- 
record review before an SSA ALJ. The beneficiary 
may be represented. 

If the request is denied, the SSA Appeals Council 
may review it if the beneficiary wishes or on its own 
initiative, and either decide or dismiss the request. 
This review is on the record only. 

After Appeals Council action, any party may 
request a hearing in U.S. District Court, if the 
amount in issue is at least $1,000. The parties may be 
represented. 

In early 1989, HCFA contracted with NDG to act 
as its agent in reviewing adverse reconsideration de¬ 
terminations after the HMO has completed its 
reconsideration review but prior to making a final de¬ 
termination. Of the 1,550 cases that NDG closed, it 
upheld the HMO decision in 713 and overturned it in 
557 cases. An additional 130 were partially upheld. 
There were 107 requests for an ALJ proceeding. 18 


Social Security Administration 

The Social Security Administration is responsible 
for two programs that provide monthly cash benefits 
to disabled individuals based on established program 
eligibility criteria—Disability Insurance (DI) 19 and 
Supplemental Security Income (SSI). 20 Although 


18 Sylvia Hendel, Office of Prepaid Health Care, Health Care Financing 
Administration, conversation with author (Washington, D.C.: December 5, 
1989). 

19 Social Security Act, Title II, 42 U.S.C., Sec. 401, et seq. 

20 Social Security Act, Title XVI, 42 U.S.C., Sec. 1381, et seq. 


funding for the two programs comes from different 
sources, the review and appeal procedures, for the 
most part, are identical. 

SSA has incorporated medical and vocational eligi¬ 
bility criteria into a complicated sequential evaluation 
process used in making decisions as to initial and con¬ 
tinuing eligibility for disability payments. The final 
step is to determine whether a beneficiary’s impair¬ 
ment meets or is equivalent to any of a large number 
of impairments, called the “medical listings.” Benefici¬ 
aries whose condition and degree of severity meet or 
are similar to a listed condition qualify for benefits. If 
a beneficiary’s condition is less severe than the listing, 
but he has specific vocational limitations that rule out 
the possibility of working, he is also eligible for either 
DI or SSI. 

Federal law requires that 65 percent of initial deter¬ 
minations of eligibility be reviewed by the Secretary 
of HHS. In addition, SSA is required to examine 
every individual on the DI and SSI roles once every 
three years to determine continuing eligibility 
for benefits. 

Disability Insurance—The DI program provides 
cash benefits to disabled workers under age 65 and 
their dependents. Individuals contribute to a Dis¬ 
ability Insurance Trust Fund through regular salary 
deductions that generally are matched by employer 
contributions. Benefit amounts are related to past 
earnings of an insured worker. In 1988, 2,830,000 
workers and an additional 1,244,000 dependents were 
on the DI roles. 

Supplemental Security Income—The SSI program is 
a federally administered income assistance program 
that provides cash benefits to needy aged, blind and 
disabled individuals who meet established medical eli¬ 
gibility and income criteria. In 1988, 4,434,069 indi¬ 
viduals received SSI benefits. 

DI and SSI Benefit Applications and Continuing Eli* 
gibility Determinations—A beneficiary applies (or is 
reviewed for continuing eligibility) for DI or SSI ben¬ 
efit at an SSA District Office (DO). The beneficiary 
is responsible for providing the necessary evidence to 
determine eligibility, but the DO will assist in acquir¬ 
ing evidence. 

The DO opens a file on the individual including all 
the known sources of medical evidence of disability. 
This is a face-to-face meeting with a DO representa¬ 
tive who is not with the decisionmaker. 

The DO determines eligibility based on all factors, 
except for medical/vocational factors. 


182 



The DO forwards the beneficiary’s file to the Dis¬ 
ability Determination Service (DDS), a state agency 
that contracts with SSA for determination of medi¬ 
cal/vocational eligibility. DDS provides trained exam¬ 
iners and physicians to make eligibility determinations 
who perform the sequential evaluation of medical/vo¬ 
cational eligibility. The decision is based on an on-the- 
record review. 

Prior to its determination, a DDS must— 

• prepare each case for determination 

• assemble available medical evidence 

• arrange for an independent medical examination 
at its own option 

• evaluate each case to see if it meets SSA dis¬ 
ability criteria. 

If a DDS denies eligibility or continuing eligibility, 
SSA must— 

• inform the beneficiary in writing of the denial 
and medical basis for the denial 

• notify the beneficiary of the right to request re¬ 
consideration of the denial 

The beneficiary requests reconsideration at the DO 
which forwards the request to the appropriate DDS 
for determination. Prior to making a decision, a DDS 
must— 

• re-examine all of the evidence in the beneficiary’s 
file 

• examine additional information submitted by or 
on behalf of the beneficiary 

• obtain new medical evidence, if indicated 

• designate an examiner and physician other than 
those making the initial determination 

Except for reconsideration of decisions to terminate 
beneficiaries from DI benefits, reconsideration is an 
on-the-record review. In only one situation, if con¬ 
tinued benefit is denied on reconsideration, the benefi¬ 
ciary may request a face-to-face hearing at the DDS. 

If the benefit is denied, SSA must provide the bene¬ 
ficiary with notification similar to the initial determi¬ 
nation notice. 

The beneficiary may request a face-to-face de novo 
hearing before an SSA ALJ. The beneficiary may be 
represented. 

If the ALJ denies the benefit, the SSA Appeals 
Council will review the case either at the 
beneficiary’s request or on its own initiative, and 
decide or dismiss the case. This is an on-the-record 
review. 


Any party may request a hearing in a U.S. District 
Court at which all parties may be represented by 
counsel. The hearing is based on evidence in the 
record only, unless there is substantial new evidence 
to be introduced. 

In 1988, there were 1,516,873 initial applications for 
DI, SSI, and DI and SSI combined, of which 36 per¬ 
cent were allowed. Nearly half of those denied initial 
eligibility appealed for reconsideration. After all 
levels of appeal had been exhausted, an additional 21 
percent of beneficiaries were declared eligible for ben¬ 
efits, bringing the total to 49 percent. For cases re¬ 
viewed at the ALJ level in 1988, 59.2 percent were 
reversed or judged favorable to the beneficiary. Of 
the 318,134 continuing disability reviews, 88 percent 
of beneficiaries were continued. Nearly half of those 
terminated appealed. After exhaustion of the appeal 
process, an additional 21 percent of those terminated 
were continued on the roles. 21 


Department of Veterans Affairs 

Veterans over 65 and totally disabled, who can 
meet a means test, may be eligible to receive pensions 
for nonservice-connected disabilities. Veterans with 
certain service-connected disabilities may be able to 
receive compensation. The amounts of the monthly 
payments for either of these programs are determined 
by disability ratings based on a statutory formula. 
Within the last two years, the review and appeal pro¬ 
cedures for the disability compensation and pension 
programs have undergone major changes, some of 
which are still being put into place. Congress has es¬ 
tablished an independent Court of Veterans Appeals, 
granting veterans an appeal to a body outside of the 
Veterans Administration for the first time since estab¬ 
lishment of the disability programs after the Civil 
War. Another recent change is the opportunity for an 
intermediate hearing and decision before a DVA 
hearing officer, after the initial determination by a 
three-person Rating Board, and prior to the appeal to 
the Board of Veterans Appeals. 

The beneficiary files a claim for benefit with the 
Compensation and Pension Service (CPS) at a local 
office of the DVA. 

A three-person Rating Board of two lay persons 
and a physician make the initial disability determina¬ 
tion. Prior to their determination they must develop 
medical evidence, including ordering an examination 


21 Ways and Means, Background Material, 49-52. 


183 



at a DVA medical facility, if they consider it 
appropriate. 

The determination is based on application of an es¬ 
tablished point system, including a list of medical con¬ 
ditions considered sufficiently disabling to establish 
eligibility. The beneficiary is entitled to an informal 
hearing and to a service organization representative. 

If the Rating Board denies the claim, the CPS sends 
the beneficiary a Notice of Decision including the 
rating decision and a statement that she/he can file 
notice of disagreement. 

If the beneficiary files a notice of disagreement, 
CPS sends her/him a Statement of the Case—a de¬ 
tailed statement of facts, law and reasons for the deci¬ 
sion, and a form on which to request an appeal to the 
Board of Veterans Appeals (BVA), a departmental 
appellate body. The beneficiary can request a hearing 
before the BVA, a CPS hearing officer (acting as an 
agent of the BVA to develop the record on which the 
BVA makes a decision), or a traveling BVA panel. 

After receiving the Statement of the Case and prior 
to requesting an appeal the beneficiary has the option, 
on her/his own initiative, to request an informal re¬ 
consideration hearing before a CPS hearing officer. 
The hearing officer may uphold, reverse or remand 
the case to the Rating Board for further development. 
The beneficiary may be represented by a service 
organization. 

The beneficiary can appeal the decision of the 
Rating Board or the hearing officer to the BVA. 
BVA hearings are based on the record developed by 
CPS hearing officers for the BVA. The BVA may 
uphold, reverse or remand the case for further devel¬ 
opment. The beneficiary may be represented by a 
service organization. 

If the BVA denies the claim, the beneficiary may 
either request a reconsideration, appeal to the Court 
of Veterans Appeals or file the claim again with CPS 
for redetermination by the Rating Board. At this 
point, the beneficiary may be represented by an 
attorney. 

The Court of Veterans Appeals is not yet oper¬ 
ational, so that its procedures cannot be described. 

The beneficiary may appeal from a denial by the 
Court of Veterans Appeals to the U.S. Court of Ap¬ 
peals for the District of Columbia. 

In 1988, 2.2 million disabled veterans and 326,000 
survivors received compensation; about 1.23 million 


individuals received pensions. In FY 1989, 3,715,414 
veterans’ and survivors’ benefits claims were adjudi¬ 
cated. Figures are not maintained on allowance and 
denial prior to the BVA level. In FY 1989, 38,673 
cases were reviewed by the Board of Veterans Ap¬ 
peals; 14 percent were allowed, 62.6 percent were 
denied, and 22 percent were remanded to the field 
office for further development of the case. 22 


Medicaid 

Medicaid 23 is a federal-state matching entitlement 
program providing medical assistance for certain cate¬ 
gories of vulnerable, low-income individuals. Within 
federal guidelines, each state designs and administers 
its own program. Review and appeal procedures must 
meet minimum federal standards. 24 

States are required to offer all beneficiaries an op¬ 
portunity for a fair hearing whenever they are denied 
or terminated from eligibility; when their claims are 
denied or not acted upon promptly; or when the 
Medicaid agency takes action to suspend, terminate, 
or reduce services. States also must describe their 
review and appeal procedures in the state plan that is 
submitted to the federal government for funding. 

Medicaid review and appeal procedures must 
include: 

• a system for hearings 

• notice 

• right to a hearing in certain circumstances 

• guarantee of maintenance of service until 
determination 

• right to review of initial decision by state agency 
including de novo hearing at request of the 
beneficiary 

• hearing procedures that meet federally mandated 
standards 

Basically, the state hearing system is required to 
meet the standards set out in Goldberg v. Kelly . 25 The 
Medicaid agency must provide for a hearing before 
the agency or a local level evidentiary hearing with a 
right of appellate hearing before the agency. The 
agency must publicize its hearing procedures and 
inform Medicaid beneficiaries in writing of their 
review and appeal rights. The agency must allow 


22 Michael Dunlop, Department of Veterans Affairs, conversation with 
author (Washington, D.C.: January 11, 1990). 

23 Social Security Act, Title XIX, 42 U.S.C., Sec. 1396, et seq. 

24 42 CFR Ch. IV, Subpart E. 

25 Goldberg v. Kelly. 397 U.S. 259 (1969). 


184 



beneficiaries to be represented by a friend or an 
attorney. 

Notice—Advance notice to beneficiaries is required 
to state what action the agency intends to take and 
the reasons for the intended action. It also must in¬ 
clude a statement of the law and an explanation of the 
beneficiary’s right to an evidentiary hearing, the cir¬ 
cumstances under which a hearing will be granted, 
and the circumstances under which Medicaid will be 
continued during the pendency of the review process. 

Right to a Hearing—The agency must grant an op¬ 
portunity for a hearing to beneficiaries requesting it 
whose claims have been denied or not acted on in a 
timely manner, and to those who request it because 
they believe the agency has taken erroneous action. 
The agency must allow beneficiaries a reasonable time 
from the date of mailing notices of adverse actions to 
request hearings. The agency may conduct group 
hearings provided that it follows federal and state 
procedures for hearings and permits each beneficiary 
to be individually represented. 

Guarantee of Maintenance of Service Until Determi¬ 
nation—The agency may not terminate or reduce 
services until a decision is rendered after a hearing 
unless the sole issue is determined to be one of law or 
policy. If the agency action is upheld at the hearing, 
the state may institute procedures to recoup the cost 
of any services furnished the beneficiary between the 
time of agency notice of adverse action and the time 
of post-hearing decision. 

Right of Review—If the local level evidentiary hear¬ 
ing results in the denial of a claim, the state agency 
must inform the beneficiary’ of the decision and of the 
right to appeal to the agency, in writing, within 15 
days of mailing the notice. Unless the beneficiary re¬ 
quests a de novo hearing, the agency may review the 
record of the initial evidentiary hearing. Hearings 
must be conducted at a reasonable time, date and 
place, after adequate written notice of the hearing, by 
impartial individuals who have not been involved in 
the initial determination. If a medical assessment is 
deemed necessary, this must be obtained at the 
agency’s expense. 

Meeting Federal Standards—The agency must allow 
the beneficiary to: 

• examine the content of the beneficiary’s case file 

• examine all documents and records to be used by 
the agency at the hearing 

• bring witnesses 

• establish pertinent facts and circumstances 

• present argument 


• confront or cross-examine adverse witnesses. 

The hearing decision must be based exclusively on 
the evidence introduced at the hearing. The record 
must consist only of the transcript and exhibits, all 
papers and requests filed in the proceeding, and the 
recommendation or decision of the hearing officer. 
The beneficiary must have access to the record. The 
decision must be written, summarize the facts, identify 
the relevant law, and specify the reasons for the deci¬ 
sion. It must be forthcoming within 90 days of the re¬ 
quest for a hearing. 

A Look at the Medicaid Procedures—Federal Med¬ 
icaid review and appeal standards are relatively strin¬ 
gent. Many of the federal benefit programs do not 
impose upon themselves the degree of accountability 
required of state Medicaid agencies. In addition, the 
level of participation of beneficiaries and their repre¬ 
sentatives in the mandated Medicaid review and 
appeal process is higher than in most federal 
programs, and the requirements to inform benefi¬ 
ciaries about all aspects of the process are more 
substantial. 


Benefit Program Review and Appeal 
Procedures—Observations 

This section has described the various ways in 
which benefit programs structure review and appeal 
procedures, and the requirements placed on benefici¬ 
aries desiring to contest adverse claims decisions. The 
complexity of these procedures and the detailed 
understanding necessary for beneficiaries to use them 
effectively appear overwhelming. Due process re¬ 
quires benefit programs to provide certain safeguards 
which might complicate the review and appeal proc¬ 
ess to some extent. But many of the more subtle as¬ 
pects of the procedures described are intended to 
serve program purposes unrelated to due process. 

The statistics on the number of reviews and appeals 
requested which accompany each benefit program de¬ 
scription emphasize this problem. In each program, 
the number of initial eligibility applications or claims 
denied is significantly larger than the number of re¬ 
views or appeals requested. Despite the fact that in 
most programs the percentage of reversals of denied 
claims is significant at both the review and appellate 
levels, the vast majority of beneficiaries receiving ad¬ 
verse determinations do not take advantage of these 
procedures. No systematic analysis has been done of 
the reasons for this. It is possible that large numbers 
of beneficiaries accept claims, trusting in the fairness 
of the determination process. Other plausible reasons 


185 


for not pursuing review and appeal remedies are igno¬ 
rance of rights or inability to cope with the com¬ 
plexity of the process. Failure to assert rights for 
these reasons amounts to a denial of due process. 


WHAT ARE THE REVIEW AND 
APPEALS PROCEDURES OF 
PRIVATE LONG-TERM CARE 
INSURANCE POLICIES 

The insurance industry generally has no legal obli¬ 
gation to provide a claims review and appeal pro¬ 
cedure. If individual insurance companies elect not 
to, they have no duty to implement procedures that 
conform to due process standards. Some insurance 
companies may view such procedures as good public 
relations or as providing them with a marketing ad¬ 
vantage in a highly competitive market. Although the 
review and appeal procedure itself is generally not 
subject to regulation, redress may be available in 
some circumstances. For example, failure to pay valid 
claims may be cause for intervention by state insur¬ 
ance departments. Also, employment-based policies 
are required to comply with certain provisions of 
ERISA, including that there be a review process and 
that claims determinations be made in a timely 
manner. 

Earl Pomeroy, the President of the National Asso¬ 
ciation of Insurance Commissioners, and Insurance 
Commissioner for North Dakota, indicates that state 
regulation has not been concerned with requiring in¬ 
surance companies to provide for review and appeal 
of denied claims. According to Mr. Pomeroy, in¬ 
surance commissioners are reluctant to support any 
regulations that would remove the claims settlement 
function from insurance companies and put it under 
governmental or independent control. 26 

Two insurance carriers with experience in employ¬ 
ment based group long-term care policies, Aetna and 
Travelers, have developed internal review and appeal 
procedures and written criteria for eligibility assess¬ 
ment. Both of these carriers stress the importance of 
an assessment instrument that can be used by assessors 
throughout the country to insure consistent benefit 
eligibility assessment for all insureds. Both carriers use 
criteria based on the number of activities of daily 
living (ADLs) with which the insured requires assist¬ 
ance. The criteria are stated in the insurance contract; 
but internal directives offer assessors more specific 
guidance about how to apply the criteria. 

26 Earl Pomeroy, telephone conversation with author, December 11, 1989. 


ORS LTC Aetna 

For community-based long-term care, the Aetna 
plan emphasizes the importance of the on-site visit of 
a case manager/assessor who determines an insured’s 
functional dependency by first-hand observation. The 
physician’s statement and medical record form part of 
the file on which a determination is made, but the 
measurement of ADLs is considered the most impor¬ 
tant information. 27 The Aetna plan provides for daily 
payment of a flat amount to insureds meeting the 
functional dependency criteria. 

The procedure for review of denied claims is not 
included in the plan information. It has, however, 
been described by an Aetna representative. When an 
individual insured under the ORS LTC Plan requests 
coverage on account of functional dependency, Aetna 
sends an employee or contract case manager to do an 
on-site assessment based on a standard set of criteria. 
The case manager—a nurse or social worker—must 
determine whether the individual is functionally de¬ 
pendent in at least two ADLs or has certain other 
qualifying disabilities. The case manager does not par¬ 
ticipate in the determination of eligibility for benefit. 
She/he makes a report to Aetna which considers this, 
along with a physician’s statement and other medical 
or social service reports, in determining the whether 
or not the insured is eligible for benefits. 

If the initial claim is denied, an internal claims com¬ 
mittee including a physician, an attorney and a claims 
supervisor unrelated to the initial decisionmaker ex¬ 
amines the file. The committee may order a medical 
or other examination or additional information. 

If the committee denies the claim, the case is re¬ 
viewed by another case manager working with the 
same claims committee. The insured is not repre¬ 
sented and there is no face-to-face interview with the 
decisionmaker. 

If the committee intends to deny the claim again, an 
Aetna representative talks with the insured’s family 
and tries to help them understand the reasons for the 
claim denial. These meetings may be face-to-face or 
on the telephone. If functional dependence has not 
progressed far enough to warrant coverage, the 
family or insured are encouraged to reapply in a few 
weeks or months. 28 


27 Travelers Insurance Co., ORS LTC Plan, Complete Description, De¬ 
cember 1988, 7 contains detailed listing of criteria. 

28 Joseph Hancock, Aetna Insurance Co., telephone conversation with 
author, November 10, 1989. 


186 




Travelers Long-Term Care Insurance Plan 

The Travelers plan offers insureds meeting the cri¬ 
teria of functional dependency the option of receiving 
a flat daily minimum benefit amount or a payment for 
actual services received (or up to five times the 
amount of the minimum benefit, whichever is less). 
The latter option requires the insured to accept a care 
plan that is coordinated by a case manager on 
contract to Travelers. The same review and appeal 
process is available to insureds who have either been 
assessed as ineligible for long-term care benefits or 
who object to aspects of the care plan. Eligibility to 
receive benefits or care management is contingent on 
the insured having a qualifying disability due to an ac¬ 
cidental injury or sickness. The insured must be deter¬ 
mined by a Travelers representative to need assistance 
with two or more ADLs from a list set out in the 
Certificate of Insurance. 29 

When an insured first requests long-term care bene¬ 
fits or disputes aspects of a care plan, the Patient Care 
Coordinator, a Travelers employee, gathers the rele¬ 
vant information, speaks with the insured’s physician, 
family, and the case manager in order to develop 
background information. The case manager then 
makes an on-site evaluation based on standardized cri¬ 
teria for measuring ability to complete ADLs. If the 
case manager and the Patient Care Coordinator agree 
to deny the claim, Travelers sends the insured a 
denial letter. This letter must include an explanation 
of the reasons for denial and information about how 
to request a review. The insured is encouraged in this 
letter to include additional information considered of 
value to the reviewer and to ask for copies of docu¬ 
ments used in the determination process. 

An insured requests a review by contacting the Pa¬ 
tient Care Coordinator. The review is made by a con¬ 
tract physician who has had no previous involvement 
in the case. If the review results in a denial, the 
insured may appeal to have a board certified geriatri¬ 
cian, on contract to Travelers and not previously in¬ 
volved in the case, do a second review. A denial at 
this stage is final. 

Decisions are made within 60 days of receipt 
of request for review or of date insured supplies all 
relevant information. Notice of denial is in writing ac¬ 
companied by reasons for the decision written in lan¬ 
guage that the insured can understand. 30 There are 
no face-to-face meetings with the decisionmaker 
except for the initial case manager’s assessment. 

29 Group Long Term Care Insurance Plan (October 1989), 4, 5. 

30 Aetna Group Long Term Care Insurance Plan Claims Information (Oc¬ 
tober 1989), 3. 


WHAT SHOULD POLICYMAKERS 
CONSIDER IN DEVELOPING THE 
REVIEW AND APPEAL PROCESS FOR 
A LONG-TERM CARE PROGRAM? 

A benefit program’s review and appeal procedures 
should be developed in the context of the total pro¬ 
gram. Procedures in existing programs vary consider¬ 
ably, primarily reflecting the diverse objectives of the 
programs themselves. 


Underlying Program Considerations 

Considerations underlying the operations of these 
programs significantly influencing the structure of the 
review and appeal process include: 

• Type of benefit 

• Source of financing 

• Structure of program administration 

• Cost containment measures 

Type of Benefit—The criteria for establishing initial 
and continuing eligibility vary substantially depending 
on type of benefit. Some benefit programs provide a 
beneficiary with periodic compensation if she/he is 
determined to have a chronic disability that results in 
eligibility (DI, SSI, DVA). Others reimburse an eligi¬ 
ble individual for certain specific medical or skilled 
care expenses, or determine eligibility for a benefit on 
a case-by-case basis in advance of providing a specific 
service (Medicare, Medicaid). Programs providing 
regular compensation based on beneficiaries’ disabil¬ 
ities, or payment for treatment of chronic medical 
conditions, are able to build into the claims process 
time for reasoned initial claims determinations (DVA, 
SSD, SSI, Medicaid). In programs providing reim¬ 
bursement for acute medical care (Medicare) this is 
more difficult. 

Source of Financing—Depending on a benefit pro¬ 
gram’s source of financing, its review and appeal 
process may be required to meet differing legal re¬ 
quirements. Generally, entitlement programs are 
funded from federal or state tax revenues (Medicaid, 
SSI). These have more stringent due process require¬ 
ments than other programs because they serve the 
most vulnerable segments of the population. Although 
DVA programs are federally funded, the historical 
justification for a somewhat limited appeal process 
was that these benefits were discretionary. The social 
insurance programs (DI, Medicare) theoretically have 
somewhat more latitude in meeting due process re¬ 
quirements for review and appeal procedures than do 
entitlement programs. In practice, however, the 


187 


28-861 - 90 - 7 : QL 3 



review and appeal procedures of DI are governed by 
the same statutory and regulatory language as SSI. 

Structure of Program Administration —When a bene¬ 
fit program directly administers its own review and 
appeal process, its obligation to provide beneficiaries 
with due process is clear. When a program delegates 
authority for part or all of the review and appeal 
process to a private organization, the legal relation¬ 
ship of that organization to the agency becomes criti¬ 
cal to determining its due process-related obligations 
to beneficiaries. 

Medicare —Medicare, for example, has delegated an 
extraordinary amount of authority over the review 
and appeal processes in all of its programs to various 
private organizations—insurance companies, HMOs 
and PROs. Commentators have identified two key 
issues resulting from this delegation that those design¬ 
ing a new benefit program need to consider: 1) the 
appropriateness of delegating major program func¬ 
tions to private organizations; and 2) the adequacy of 
the procedures under this arrangement to protect 
Medicare beneficiaries’ interests. 31 

The U.S. Supreme Court in Schweiker v. 
McClure,* 2 decided that hearings under Medicare 
Part B, delegated by HCFA to private insurance car¬ 
riers, are constitutional if they provide adequate pro¬ 
cedural due process. Despite this decision, the issue of 
the appropriateness of delegating benefit determina¬ 
tions to private contractors remains controversial. In 
1986, Congress enacted provisions requiring that, at a 
beneficiary’s request, HCFA must provide for a 
hearing by an SSA ALJ on appeal from a Part B car¬ 
rier hearing if the amount in issue exceeds $500. 3 3 
Even though the ALJ is an employee of SSA, the 
office of ALJ is mandated to provide independent 
adjudication. 

Social Security Programs —The Disability Advisory 
Committee to the Commissioner of Social Security 
was appointed in February 1989 to examine and make 
recommendations improving the effectiveness of the 
SSA (disability claims review) and appeal process. As 
contractors to SSA, state DDSs make initial claims 
and reconsideration determinations regarding eligi¬ 
bility for medical disability pensions. The committee 
reported a lack of uniformity among state DDS per¬ 
sonnel in application of standards to specific eligibility 
determinations. It found that a wide variation among 
states in allowance rates had resulted in a high rate of 
appeals and reversals of determinations at the ALJ 


* 1 Eleanor Kinney, Medicare Appeals System, 97. 

32 456 U.S. 188 (1981). 

33 42 U.S.C., Sec. 1395fT. 


level. 34 It recommended that SSA pursue specific 
management initiatives to improve uniformity in, and 
accountability for, disability determinations among 
DDSs. 35 

Cost Containment Measures —Ideally, cost contain¬ 
ment decisions should be made in relationship to a 
benefit program’s basic policies and practices, not in 
the design or operation of its review and appeal pro¬ 
cedures. Benefit programs have been criticized, how¬ 
ever, for using the review and appeal process to 
balance cost containment considerations against pro¬ 
gram requirements that funds be disbursed to eligible 
beneficiaries. 

Containing Costs Within Benefit Programs —Two 
significant approaches to containing costs are: 1) to 
reduce administrative expenditures, including expendi¬ 
tures on review and appeal procedures and 2) to in¬ 
crease determinations of noneligibility for benefits. 36 
Selection of either of these options may involve both 
a monetary cost to the program and a cost in program 
credibility. 

The first approach may limit an agency in offering 
an effective review and appeal process. SSA, for ex¬ 
ample, has been criticized by the National Association 
of Disability Examiners (NADE) when, as part of a 
drive to increase administrative efficiency, it placed a 
limit of 37 percent on the number of cases in which 
disability examiners can hire consulting physicians to 
examine beneficiaries. NADE asserts that this seri¬ 
ously disadvantages beneficiaries because it suppresses 
the examiner’s ability to create an adequate record. 37 
The second approach may result in incorrect and 
unfair disability determinations. These could lead, in 
turn, to increased resort by beneficiaries to the review 
and appeal process. A recent congressionally-man- 
dated report of the Advisory Committee on Medicare 
Home Health Care that examined the reasons for an 
overwhelming number of home care benefit denials 
found that the increase in denials was related in part 
to deliberate HCFA practices. 38 

Containing Costs Through Placement of Risk —Con¬ 
gress has developed specific policies intended to con¬ 
tain costs by placing the risk for inappropriate use of 
the health care system on providers and beneficiaries 
rather than on benefit programs. One such policy re- 


34 Disability Advisory Committee to the Commissioner of Social Security, 
Report (July 25, 1989), 1. 

35 Disability Advisory Committee, Report, Tab B, 2, 17-18. 

36 Eileen Sweeney, National Senior Citizens Law Center, conversation 
with author (Washington D.C.: November 1, 1989); see Duggan v. Bowen, 
691 F.Supp. 1487, 1500 (DDC 1988). 

37 K.J. Gunter, NADE President, letter to David Rust, Social Security 
Administration, U.S. Department of Health and Human Services, April 1989. 

38 Advisory Committee on Medicare Home Health Care, Report to Con¬ 
gress and the Health Care Financing Administration, July 1, 1989. 


188 




quires prospective payment and bases it on pre-estab¬ 
lished Diagnosis Related Groups (DRGs) within 
which a beneficiary’s condition falls. It bases reim¬ 
bursement on the average length and cost of treat¬ 
ment for a condition rather than on the actual cost of 
services provided. 

Another policy establishes liability in beneficiaries 
and providers for the cost of services already pro¬ 
vided that are not covered by Medicare’s “medically 
necessary” standard. A policy waiving liability of 
beneficiaries or providers deemed unaware that Medi¬ 
care would not cover the service was adopted subse¬ 
quently to mitigate the impact of the first policy. In 
such situations, either Medicare or the provider must 
bear the cost of the care provided. If Medicare deter¬ 
mines that the provider should have been aware that 
the service or confinement was not covered by Medi¬ 
care, the provider is liable. 

Finally, Congress has authorized HCFA to contract 
with risk HMOs to provide medical care to those 
Medicare beneficiaries choosing this option. These 
private organizations provide care to members based 
on a pre-determined per capita fee. Reimbursement 
from Medicare is based on these fees, so that the 
burden of estimating accurately the cost of medical 
care for a contract period falls on the HMO. The 
HMO is able to pass on the burden of underestimating 
costs to beneficiaries by limiting or denying health 
care in certain situations in order to reduce costs. 

The economic and public policy considerations of 
risk placement are complex. Placing a heavy risk for 
incorrect decisions as to covered services on pro¬ 
viders has led them, quite naturally, to attempt in var¬ 
ious ways to transfer this burden to beneficiaries. 

Transferring Costs to Beneficiaries—SNFs and 
HHA’s —With respect to SNFs and HHAs, Medicare 
Part A encourages providers to transfer the risk for 
noncovered services to beneficiaries by requiring ben¬ 
eficiary claims to be made by providers on behalf of 
beneficiaries, rather than by beneficiaries directly. But 
Medicare also penalizes providers for submitting too 
many beneficiary requests for payment for services 
Medicare does not cover. 

Frequently, if service providers are unsure about 
whether Medicare will cover the costs of a particular 
service, they simply inform beneficiaries that the serv¬ 
ice is not covered, rather than waiting for a Medicare 
determination as to coverage. In this way, providers 
can request payment directly from the patient and not 
run the risk of providing an expensive service for 
which, at some later date, Medicare may refuse reim¬ 


bursement. 39 This practice leaves beneficiaries unable 
to exercise their review and appeal rights because 
technically there has never been a decision of 
noncoverage made by Medicare. 

Theoretically, beneficiaries can demand that pro¬ 
viders submit claims to Medicare on their behalf. 
Beneficiaries’ advocates indicate that most do not do 
so. This may be either because they are uninformed of 
their rights or are unwilling to antagonize the pro¬ 
viders whose interests they perceive as conflicting 
with their own, but on whom they depend for essen¬ 
tial care. 40 In addition to inhibiting beneficiaries in 
the exercise of their review and appeal rights, a 
system that makes providers responsible for claims de¬ 
cisions undermines the trust relationship critical to 
their ability to serve their patients effectively. In the 
case of Medicare, the result has been to increase both 
beneficiary and provider dissatisfaction with Medi¬ 
care’s ability to make fair decisions. 

Recently, HCFA entered into a settlement agree¬ 
ment with representatives of beneficiaries whereby it 
agreed to require that providers give beneficiaries 
written notice, uniform among all providers, of the 
right to request a Medicare determination if the pro¬ 
vider decides that particular services are not covered 
by Medicare, and to withhold request for payment 
until after the fiscal intermediary’s initial Medicare de¬ 
cision. 41 While this agreement partially alleviates con¬ 
cerns of beneficiaries, it increases the burden on 
providers, and inadequately addresses the basic source 
of conflict between the two. A policy that would 
allow beneficiaries to submit claims themselves and to 
withhold payment until they are either reimbursed or 
have exhausted appeal rights might satisfy benefici¬ 
aries’ concerns. But the cost to providers of exten¬ 
sively deferred payment for services would be 
substantial. 

Transferring Costs to Beneficiaries—Hospitals —For 
beneficiaries in hospitals, the verbal request from the 
hospital or physician that the patient leave could also 
result in denial of covered care. Patients are given a 
general notice of rights at the time of admission that 
states, among other things, that they may formally 
object to such a request. Representatives of benefici¬ 
aries are concerned, however, that most patients 
would not be able to advocate effectively about their 
discharges because of their illness or the stress of hos¬ 
pitalization. Many may not even remember receiving 


39 Susan Pettey, American Association of Homes for the Aging, conversa¬ 
tion with author, Washington, D.C., November 30, 1989; Selected Staff of 
Bureau of Program Operations, Health Care Financing Administration, con¬ 
versation with author (Baltimore, Md.: November 17, 1989). 

40 William Dombi, National Home Care Association, conversation with 
author (Washington, D.C.: October 11, 1989). 

41 Sarrasat v. Sullivan. C88-201-61 RPA USDC, NDCal. (May 4, 1989). 


189 



a statement of rights. 42 Upon being told it is time to 
leave the hospital and that Medicare will not cover a 
continued stay, most beneficiaries leave voluntarily. 

But the request itself is not a Medicare determina¬ 
tion of noncoverage. Particularly where the hospital 
and physician agree about the discharge, beneficiaries 
rely on their expert judgment, both that continued 
hospitalization is not necessary, and that Medicare 
will no longer pay for it. Because of the DRG 
system, hospitals, in particular, have incentives similar 
to SNFs prematurely to discharge beneficiaries whose 
continued stay might not be covered by Medicare. 
Otherwise, they may be held liable if the services ulti¬ 
mately are not covered and they have failed to so 
notify the beneficiary. There is, however, limited pro¬ 
tection of beneficiaries against arbitrary discharge: if a 
beneficiary is rehospitalized in any hospital for a simi¬ 
lar condition within 30 days of discharge, the hospital 
of original discharge is penalized. 

Program Considerations in 
Long-Term Care 

Although the focus of a long-term care program 
would be somewhat different from that of the existing 
benefit programs, each of the program considerations 
described above is critical to the design of its review 
and appeal procedures. In addition, particular charac¬ 
teristics of the benefits and structure of a long-term 
care program will have an impact on its review and 
appeal procedures. 

Determination of Benefits —Significant consider¬ 
ations in determining eligibility for participation in a 
long-term care program and for receiving reimburse¬ 
ment for specific services are: 

• Once an individual is determined to be eligible 
for long-term care, decisions are more likely to 
be about changes in the amount or level of 
services to which she/he is entitled than about 
the total discontinuation of all services to that 
individual 

• A beneficiary’s needs generally will be for custo¬ 
dial or social support rather than skilled nursing 
or medical services 

• When available, a beneficiary’s family or mem¬ 
bers of her/his informal support system are likely 
to participate with the beneficiary and long-term 
care program staff in planning for a beneficiary’s 
care 


42 Charles C. Hulin, Center for Medicare Advocacy, telephone conversa¬ 
tion with author, November 8, 1989. 


• Long-term care involves decisionmaking about 
benefits to meet both chronic and acute care 
needs, rather than focusing on one or the other. 

• The central role of the case manager—one who 
designs, coordinates and monitors the long-term 
care plan for the beneficiary—is without parallel 
in existing benefit programs in terms of power 
over the beneficiary, and potential for ambivalent 
allegiance between the client/beneficiary and the 
long-term care program employer. 

Program Structure —Inevitably, some decisions 
made about the structure of the long-term care pro¬ 
gram will have adverse economic, social or therapeu¬ 
tic consequences for beneficiaries. Such decisions will 
be a basis for beneficiary complaints. These include: 

• whether an applicant meets the various eligibility 
criteria such as sufficient dependency in ADLs to 
participate in the program 

• whether the setting in which a beneficiary could 
benefit most is community or institutional care 

• whether, and at what point, a beneficiary is eligi¬ 
ble for specific benefits or services, and the dura¬ 
tion and frequency of these services 

• establishing the appropriate relationship of the 
individual or organization responsible for assess¬ 
ing eligibility to those responsible for developing 
care plans or making specific care-related deci¬ 
sions about beneficiaries 

• establishing the relationship of the assessment and 
care management functions to the agency financ¬ 
ing the long-term care program 

• determining the mechanism for frequent reassess¬ 
ment of a beneficiary’s needs or of the benefits or 
services to be provided in a long-term care 
program 

• providing quality control activities such as moni¬ 
toring the level of services provided under the 
long-term care program 

Claims Decisionmaking in Long-Term Care —In 
order to assure the credibility of the program with 
beneficiaries and the general public, the claims deci¬ 
sionmaking function should, to the extent possible, be 
independent of eligibility assessment, care plan design, 
monitoring or service provision. Confusion of roles 
could arise in the administration of a long-term care 
program that does not separate these functions 
adequately. 

The Case Manager—Care Plan Design and Moni¬ 
toring —The role of the case manager raises issues 
regarding review and appeal procedures that arise in¬ 
frequently in existing benefit programs. (There are 
probably parallel situations in home health care under 


190 



Medicare and Medicaid, and in Medicare HMOs.) 
The significant care-related decisions in a long-term 
care program are likely to be made by a case man¬ 
ager—for example, a nurse or social worker—who 
establishes a care plan and manages the care to be 
provided the beneficiary. If the beneficiary is able to 
remain in the community, the case manager will iden¬ 
tify and arrange for the provision of appropriate serv¬ 
ices to the beneficiary, and determine the number of, 
hours, days or weeks the service should be provided. 

A critical issue for the case manager may be that of 
serving two masters. The case manager must have a 
relationship of trust with the beneficiary in order to 
gain the cooperation necessary to implement appro¬ 
priate care decisions. She/he might also be expected 
by the agency financing or administering the program 
to enforce certain program guidelines that result in 
containing costs by limiting services or benefits. 

Cost Containment —Reasonable cost containment 
measures would include efficient division of the case 
manager’s time among beneficiaries, or developing 
care plans that are closely tailored to a beneficiary’s 
minimum needs. If a case manager is unduly vulner¬ 
able to pressure from the benefit program, it may 
become difficult to resist directives to increase the 
case load or trim the care plan. If the program is fi¬ 
nanced similarly to Medicare HMOs, so that the case 
manager receives a flat per-client monthly fee based 
on a predetermined estimate of cost of service to all 
clients served, there is likely to be substantial incen¬ 
tive to keep costs down. If this occurs at the expense 
of fair decisions about services to beneficiaries, a due 
process problem can arise. One experienced benefit 
program administrator warned that a case manager 
under the close control of the funding agency, making 
decisions about benefits, generally is perceived with 
skepticism by the beneficiaries. 43 

Mitigating Considerations —According to the Na¬ 
tional Association of State Units on Aging (NASUA), 
the experience of state financed long-term care 
programs is that case managers in community care 
programs have not been placed in conflicting roles. 
Currently, in most states, the cost of community care 
is tied to the daily nursing home rate which is sub¬ 
stantially higher than the cost of services in the com¬ 
munity. Consequently, home care programs rarely 
spend their annual budgets and are under no pressure 
to reduce program costs beyond appropriate levels. In 
addition, community long-term care case managers 
may tend to authorize more services than most older 
persons want. Many elderly are wary of managed 

4 * Patricia Booth, Division of Peer Review, Office of Peer Review, Health 
Quality Standard Bureau, Health Care Financing Administration, conversa¬ 
tion with author (Baltimore Md.: November 17, 1989). 


care programs and see those who provide these 
services as intruders into their lives. 

Also, the community-based nature of the program 
may work as a counter-weight to any bureaucratic 
pressures on case managers to favor administrative 
considerations over client needs. In contrast to the 
Medicare program, whose initial decisionmakers are 
distant, inaccessible insurance companies, community 
long-term care case managers are attuned to commu¬ 
nity values and are required to maintain an ongoing 
relationship with clients about whom they make ad¬ 
verse decisions. 44 


WHAT HAS BEEN THE EXPERIENCE 
OF EXISTING BENEFIT PROGRAMS 
WITH DEVELOPING AND 
IMPLEMENTING REVIEW AND 
APPEAL PROCEDURES THAT PROVIDE 
ADEQUATE DUE PROCESS? 

The primary purpose of due process is not to insure 
that as many beneficiaries as possible be determined 
eligible for benefits. Rather it is to increase the ca¬ 
pacity for fair and accurate decisionmaking about 
beneficiaries’ rights—“to pay worthy claims and 
reject unworthy ones.” 45 


The Complexity of the Process 

The review and appeal procedures of each of the 
benefit programs described in this report are required 
to meet constitutional requirements for review and 
appeal procedures. But the concepts of what consti¬ 
tutes due process are complex and subject to differing 
interpretations. 

During the last decade the review and appeal pro¬ 
cedures of Medicare, DI, SSI and DVA have all been 
the targets of extensive Congressional oversight. This 
has led to legislation revamping some of these proce¬ 
dures in order to provide increased due process to 
beneficiaries. In addition, in recent years, the federal 
courts have ordered the agencies administering these 
programs to make major changes in review and 
appeal procedures to further protect beneficiaries. Fi¬ 
nally, several administrative commission reports and 
U.S. General Accounting Office audits have recom¬ 
mended ways to ensure an improved level of due 


44 Diane Justice, National Association of State Units on Aging, conversa¬ 
tion with author (Washington, D.C.: November 15, 1989). 

45 Jerry Mashaw, “Bureaucratic Justice,” Symposium on Federal Disability 
Benefit Programs, American Bar Association, 1985, 191. 


191 




process for beneficiaries. Significant goals of due 
process addressed in this section include the right to: 

• Representation by lay advocate or attorney 

• Adequate notice and timely determinations 

• Access to the information on which determina¬ 
tions are based 

• A decision based on an adequately developed 
record 

• Make a verbal statement in front of the 
decisionmaker 

• A hearing prior to denial or termination of a ben¬ 
efit, if possible 

• A determination by an impartial decisionmaker 

This section examines the practical difficulties that 
benefit programs have in achieving these goals, using 
illustrations from past and current experience of these 
programs. 

Right to Representation 

Because there is an inherent lack of parity between 
the two parties, vulnerable elderly or disabled bene¬ 
ficiaries frequently need representation when con¬ 
fronting powerful government benefit programs. In 
addition, beneficiaries may need assistance of trained 
individuals in order to prepare adequately for reviews 
and appeals. 

Despite the availability of several sources of attor¬ 
ney compensation, a significant number of benefici¬ 
aries do not have, and cannot get, legal representation 
at appellate level hearings. In addition, few benefici¬ 
aries have either legal or lay representation during the 
early stages of the review process, either because they 
are not adequately informed about its usefulness and 
availability, or because it is unavailable. 

Nonadversarial Process—The review and appeal 
process in benefit programs is generally considered 
nonadversarial. Theoretically, SSA ALJs and the 
BVA wear three hats—objective judge, government 
representative, and spokesperson for the beneficiary, 
particularly if she/he is unrepresented. The govern¬ 
ment is not represented by counsel at any stage of the 
administrative process. Several years ago SSA de¬ 
cided to experiment with using a system providing 
government with representation by counsel at benefi¬ 
ciaries’ hearings before an ALJ. Both SSA and advo¬ 
cates for beneficiaries indicate, for different reasons, 
that this was not effective. One reason on which both 
sides agree is that, as the procedure became increas¬ 
ingly adversarial, hearings became more technical and 


time consuming. 46 Eventually, a federal court ruled 
that the experiment as conceived and operated by 
SSA was unconstitutional. 47 

In general, both advocates and agency administra¬ 
tors consider that the nonadversarial process is more 
effective than traditional trial-type procedures would 
be. Attorneys representing veterans express some 
concern that BVA may have difficulty maintaining in¬ 
dependence from DVA because most individuals ap¬ 
pointed to serve on BVA are long-time employees of 
DVA or are involved in other ways with veterans’ 
groups. 48 

Representation in Benefit Programs—Representation 
increases the percentage of allowances in benefit pro¬ 
grams. All benefit programs permit beneficiaries to be 
represented by attorneys or lay representatives at 
some stage in the claims process. Although early rep¬ 
resentation may increase the likelihood that benefici¬ 
aries will be satisfied with benefit program decisions, 
most programs do not encourage this. 49 

—Historically, DI and SSI have permitted legal 
or lay representation from the earliest stage of the 
claims process. As a practical matter, however, bene¬ 
ficiaries generally are not represented until the hear¬ 
ing before an ALJ. According to SSA, 85 percent of 
beneficiaries appearing before an ALJ are repre¬ 
sented, 67 percent of these by attorneys. 50 

Medicare —In Medicare proceedings, beneficiaries 
generally are not represented until the ALJ hearing, if 
at all. Medicare rules permit representation at a Part 
B carrier level hearing and at an HMO reconsider¬ 
ation hearing, if the beneficiary requests such a hear¬ 
ing. Under Part A, there are no hearings by Medicare 
officials or agents, but beneficiaries have a right to an 
ALJ hearing at which they can be represented. The 
PRO’S obligation to contact beneficiaries personally 
to discuss disputes over hospital discharge is not a 
hearing as contemplated by due process. 

DVA —The DVA has a long history of preferring 
lay over legal representation at all levels of the proc¬ 
ess. Until recently, there was a statutory limit on at¬ 
torneys’ fees, dating from after the Civil War, of ten 
dollars per case. Charging fees in excess of this 


48 Eileen Sweeney, conversation with author; Jean Hinckley, Social Secu¬ 
rity Administration, conversation with author, November 6, 1989. 

47 Sailing v. Bowen, 641 F.Supp. 1046, USDC WDVA, (1986). 

48 Michael Wildhaber, National Veterans Legal Services Project, conver¬ 
sation with author (Washington, D.C.: December 4, 1989). 

49 Ayn Crawley, Legal Counsel for the Elderly, conversation with author 
(Washington, D.C.: November 2, 1989); Jean Hinkley, conversation with 
author. 

50 U.S. Department of Health and Human Services, Social Security 
Administration, “Attorney Fees Under Title II of the Social Security Act.” 
Report to Congress, July 1988, 12. 


192 



amount was a felony. For many years, congressionally 
chartered veterans’ service organizations have repre¬ 
sented beneficiaries in these proceedings for free from 
filing the initial claim through the appeal to BVA. 
The law requires service organizations to represent 
any veteran requesting it regardless of service organi¬ 
zation membership or apparent validity of the claim. 
The proposed rules of the newly established Court of 
Veterans Appeals authorize legal counsel and certified 
lay representatives to represent beneficiaries before 
the Court. Attorneys may represent beneficiaries in 
BVA proceedings, but only after a case has gone 
before the BVA and been denied, and is being re¬ 
opened at the initial decision level for a new review 
and appeal cycle. 

Critics of the service organization representation 
system contend that these organizations are too 
closely tied to DVA to be able to provide fair repre¬ 
sentation in claims against DVA. 51 Service organiza¬ 
tion representatives consider that their frequent and 
close contact with DVA enables them to negotiate 
quite effectively on behalf of clients. 52 

Fees—Frequently, beneficiaries are not represented 
by attorneys at benefit hearings because they cannot 
afford the fees. Under the Social Security Act, if a 
beneficiary prevails in a DI case, the ALJ may order 
that a payment of up to 25 percent of the amount of a 
past due claim be withheld from SSA’s payment to 
the beneficiary and paid directly to the attorney. In 
SSI and Medicare cases, the ALJ may order the same 
amount of payment, but SSA and HCFA do not 
deduct the amount from beneficiary’s check. 53 The 
amount of payment for services rendered earlier than 
the ALJ stage in these programs is between benefici¬ 
ary and counsel. 

Under the Veterans Judicial Review Act, attorneys 
seeking compensation directly from beneficiaries must 
file a copy of the fee agreement with the Court of 
Veterans Appeals which may affirm the agreement or 
order it reduced. Decisions to affirm are based on rea¬ 
sonableness of the fee. If an attorney has a contingent 
fee arrangement with the beneficiary, it may not 
exceed 20 percent of past-due benefits. 54 

BVA may determine a reasonable fee for adminis¬ 
trative representation which also may not exceed 20 
percent of past-due benefits for contingent representa¬ 
tion. DVA is setting up a system to pay attorneys 
whose clients prevail prior to sending the past-due 
benefits to beneficiaries. 


61 Michael Wildhaber, conversation with author. 

62 John A. Sommer, Jr. and Philip R. Wilkerson, American Legion, con¬ 
versation with author (Washington, D.C.: January 16, 1990). 

63 42 U.S.C., Sec. 206(a); 42 U.S.C., Sec. 1631(dX2). 

64 38 U.S.C., Sec. 4063. 


Attorneys representing benefit program benefici¬ 
aries before federal courts may receive compensation 
under the Equal Access to Justice Act. 55 They will 
also be able to receive compensation from this source 
for representation before the Court of Veterans 
Appeals. 

Legal services attorneys sometimes represent low- 
income beneficiaries at ALJ hearings. In addition, 
some states (e.g. CT, CA) have created services that 
represent beneficiaries in Medicare, DI and SSI cases. 
If a significant number of individuals can be trans¬ 
ferred from state to federal benefit program rolls, ef¬ 
fective advocacy can reduce state expenditures on 
health care benefits. 


Adequate Notice 

Due process requires that beneficiaries receive two 
types of notice: claims denials and procedures for 
review and appeal. Frequently, benefit programs com¬ 
bine both types of notice in one missive. 

Elements of Notice— 

Denial of Benefits —When an individual’s medical 
condition or eligibility for skilled care are at issue, the 
denial or termination notice must indicate why 
her/his condition does not warrant a particular dis¬ 
ability status, course of treatment or level of care. 56 
Implementation of this requirement has resulted in liti¬ 
gation. A federal district court has decided, for exam¬ 
ple, that if a particular administrative procedure, such 
as a utilization screen, is used to determine that an in¬ 
dividual is no longer entitled to a particular course of 
treatment, the notice must identify the screen. In this 
way, a beneficiary can rebut the validity of its appli¬ 
cation in her/his case. 57 

Beneficiaries’ Rights —In addition, notice must con¬ 
tain information about beneficiary’s appeal rights: the 
time, date and place of filing a request for appeal and 
any hearings that the beneficiary is entitled to attend. 
Benefit programs have been criticized for distributing 
unclear statements of beneficiaries’ rights or notices 
containing differing outcomes or inconsistent informa¬ 
tion regarding the determination of similar claims. 58 

Another ground for dissatisfaction is that benefit 
programs place the initiative for requesting reviews 
on beneficiaries by not automatically informing them 


55 28 U.S.C, Sec. 2417 (b), (d). 

58 Gray Panthers v. Schweiker, 652 F.2d 146, 1981. 

87 Vorster v. Bowen, 709 F.Supp. 934, (CDCal. 1989) 1989. 

58 Michael Parks, Bet Tzedek Legal Services, telephone conversation with 
author, October 23, 1989; Susan Pettey, conversation with author. 


193 




that certain types of review procedure are available. 
For example, veterans’ service organizations have 
criticized DVA for not publicizing the availability to 
beneficiaries of certain intermediate level hearings or 
of BVA reconsideration hearings. 59 

Inconsistent Notice —Frequently, inconsistency re¬ 
sults when a benefit program delegates its review and 
appeal functions to contract organizations without re¬ 
taining substantial control over their performance. 
Currently, for example, presentation to Medicare Part 
A beneficiaries of notice of appeal rights at time of 
discharge depends on the policies of individual hospi¬ 
tals. The Administrative Conference of the United 
States 60 has recommended that HCFA amend PRO 
regulations to ensure that all Medicare beneficiaries 
are informed of their appeal rights at the time they 
are notified of the hospital’s intention to discharge 
them. 

The review practices of Medicare HMOs, including 
content of notices, are almost totally unsupervised by 
HCFA. Although HCFA instructs HMOs to provide 
beneficiaries with written reasons for denial, HCFA is 
aware that many do not comply. 61 In response to 
pressure from the courts, HCFA is taking more direct 
responsibility for the conduct of its SNF and HHA 
contractors regarding notice procedures. 62 

Clarity of Notice —Although beneficiaries’ repre¬ 
sentatives generally laud Medicare for providing all 
hospitalized beneficiaries with a general notice of 
their appeal rights on admission, some also consider 
this statement to be unnecessarily vague. 63 Others 
concede that a general notice, meaningful to all bene¬ 
ficiaries, is especially difficult to formulate. 64 The 
Disability Advisory Committee recently has recom¬ 
mended that SSA improve its review and appeal 
process by providing beneficiaries with “written clari¬ 
fication of the law and regulations so as to specify 
the rights and responsibilities of the parties to the 
process. . 65 

Problems With Notice of Denial —Many benefit pro¬ 
gram notices lack clarity and specificity. Simplicity of 
language is particularly important when the benefici¬ 
ary population is relatively uneducated. But notices 


59 John A. Sommer, Jr. and Philip R. Wilkerson, conversation with 
author. 

80 Recommendation 89-1, Peer Review and Sanctions in the Medicare 
Program, June 12, 1989. 

61 Carlos Zarabosa, Office of Prepaid Health Care, Health Care Financing 
Administration, conversation with author (Washington, D.C.: November 27, 
1989). 

82 Sarrassat v. Sullivan, C88-201-61 RPA USDC, NDCal. (May 4, 1989). 

83 Charles C. Hulin, conversation with author, Alfred Chiplin; National 
Senior Citizens Law Center, conversation with author (Washington, D.C.: 
November 13, 1989). 

84 Alan K. Kaplan, Consultant on Medicare PROs, conversation with 
author (Washington, D.C.: November 15, 1989). 

85 Disability Advisory Committee, Report, 2. 


are required to provide beneficiaries with a lot of in¬ 
formation, so that both language and presentation 
quickly become complicated. In addition, computer¬ 
ization of notices has rigidified notice design. Fre¬ 
quently, rather than using lay vocabulary, the 
language of a notice tracks the wording of a statute or 
regulation. A professor of linguistics who has con¬ 
sulted to the Social Security Administration on re¬ 
writing its notices has observed that “bureaucrats 
learn to use the jargon and acronyms of their own 
agencies but they tend to exert little effort to commu¬ 
nicate effectively with the world outside the 
agency.” 66 

Criticisms of Notices —The description of the reasons 
for benefit denial or termination seem especially diffi¬ 
cult to articulate. Recent legislation responding to a 
GAO criticism of DVA notices requires DVA to 
include more specific reasons in its claims denial no¬ 
tices. 67 GAO found that in 60 percent of compensa¬ 
tion cases notices inadequately explained reasons for 
denial. In the same report, GAO applauded SSA for 
successfully reforming its disability denial notices in 
response to a 1980 Congressional mandate that it 
“provide more information and personalize” these no¬ 
tices. 68 In recent years, Medicare Part A denial no¬ 
tices have become more responsive. Beneficiaries now 
receive a checklist indicating reasons for denial. 

In addition, the Medicare Part B Carriers Manual 
instructs carriers to write review determination letters 
at the sixth to seventh grade level, and indicates how 
to establish this reading level. 69 There is no system¬ 
atic information available on the success of this effort. 

Informal Verbal Denials —Another problem related 
to the inadequate denial notice is the informal verbal 
denial. The Vietnam Veterans of America Legal 
Services, “Self-Help Guide on VA Claims,” for exam¬ 
ple, warns veterans not to be discouraged if, over the 
phone or at the front desk, a VA employee tells them 
they are not entitled to benefits. 70 Advocates for DI 
and SSI beneficiaries indicate that SSA employees 
sometimes discourage individuals from applying for 
benefits. 71 

This sort of denial, which does not have the sanc¬ 
tion of law in any benefit program, would be difficult 


88 Roger W. Shuy, “Changing Language Policy in a Bureaucracy,” 
Georgetown University Roundtable: 1987, 152. 

87 38 U.S.C., Sec. 3004 (1989). 

88 General Accounting Office, Veteran’s Benefits: Improvements Needed in 
Processing Disability Claims (Washington, D.C.: June 22, 1989). 

89 Health Care Financing Administration, U.S. Department of Health and 
Human Services, Medicare Carriers Manual, Part 3, Claims Process, Revision 
1291, sec. 12010.2, February 1989, 12-15. 

70 Vietnam Veterans of America Legal Services, Self-Help Guide on VA 
Claims, February 1988, 1. 

71 Eileen Sweeney, conversation with author. 


194 




for a beneficiary to prove. Recently enacted legisla¬ 
tion allows an eligible beneficiary proving that such a 
conversation occurred in a DI or SSI case to receive 
benefits back-dated to the initial inquiry. 72 Problems 
raised by providers’ verbal denials to beneficiaries, es¬ 
pecially in hospital, SNF and home care situations, 
are discussed in Section V, above. 


The Toll-Free Number 

Benefit programs have instituted toll free numbers 
as a means of enabling beneficiaries to make claims- 
related inquiries, including inquiries about un¬ 
clear information in notices. According to HCFA, the 
Medicare Part B 800-number, which is operated by 
the carriers that process these claims, has had 27.8 
million inquiries in the past year, 80 percent of which 
were claim related. 

SSA also has a toll free number for claims inquiries. 
The number was instituted along with a cut-back of 
District Office personnel. Critics claim that there is 
not enough staff to answer all of the phone calls, so 
that beneficiaries frequently cannot get through to an 
SSA representative. 73 

The Veterans’ Assistance Service, with a Washing¬ 
ton office and several regional offices, receives a large 
number of calls. It appears to be reasonably effective 
in providing information about claim and appeal pro¬ 
cedures to callers. Beneficiaries’ representatives indi¬ 
cate that the information provided may not always be 
reliable, and suggests that beneficiaries write directly 
to DVA general and claims related information. 74 


Timeliness of Review 

In addition to adequate notice, due process requires 
expeditious review, particularly when the disputed 
benefits provide essential living allowances or critical 
medical care. In practice, all benefit programs have 
difficulty achieving speedy resolution of disputed 
claims. 

The length of time involved in asserting review and 
appeal rights in benefit programs from initial claim 
submission to final agency appellate review may be a 
substantial disincentive to beneficiaries’ pursuit of 
their review and appeal rights. 

72 p l 101-239, Sec. 10302, Congressional Record, November 21, 1989, 

H9444. 

73 Eileen Sweeney, conversation with author. 

74 Michael Wildhaber, conversation with author. 


Although most agencies provide guidance as to an 
acceptable length of time to review a case, few re¬ 
quire by regulation that the various stages of adminis¬ 
trative review be completed within a pre-established 
time period. Medicare insurance carriers’ contracts 
with HCFA contain numerical targets for processing 
claims and review requests which are monitored by 
HCFA. 75 One negative result of setting quantitative 
goals and quotas for review of claims has been deter¬ 
minations based on inadequately developed records. 76 
The Disability Advisory Committee recognized that 
due process rights should not be sacrificed to con¬ 
cerns about processing time. 77 

Despite their sympathy for the need to develop 
adequate records, beneficiaries’ representatives com¬ 
plain that the review process generally takes an inor¬ 
dinate amount of time. Although program statistics 
bear out the validity of this criticism, there has been 
little litigation on the subject of timely review in ben¬ 
efit programs. 

Benefit Program Performance—Available figures in¬ 
dicate that average processing times for administrative 
review and appeal can be as long as two years. In the 
DVA, for example, original claims average 90 to 150 
days to process. The average time for a claim to go 
from initial denial to the final administrative appeal 
level, the BVA, is about one year. 78 The BVA takes 
an average of 151 days to render its decision. The 
time variations among fiscal intermediaries in review¬ 
ing Medicare Part A claims are great. One beneficiary 
representative reports that some cases take as long as 
eight months in the initial review stage and an addi¬ 
tional two to eight months for reconsideration. 79 

In May 1989, Medicare Part B claims took 224 days 
from request to ALJ hearing. Medicare Part B cases 
reaching the ALJ determination level between Janu¬ 
ary 1987 and June 1989 took an average of 154 days 
from filing to decision for on-the-record reviews and 
299 days for in-person hearings. The most time-con¬ 
suming step in the in-person hearing process was the 
assignment of cases to analysts in SSA’s Development 
Center, a recently created body that reviews Medi¬ 
care cases prior to assignment to the ALJ. 80 

DI and SSI cases may take as long as 676 days 
from filing initial claim request until the ALJ renders 


75 42 U.S.C. Sec. 1395u(bX2XB). 

7 6 Eileen Sweeney, conversation with author; John A. Sommer Jr. and 
Philip R. Wilkerson, conversation with author. 

77 Disability Advisory Committee, Report, 7. 

78 J.H. Spindle and Robert Yurgal, Department of Veterans Affairs, con¬ 
versation with author (Washington, D.C.: January 6, 1990). 

7 9 Charles C. Hulin, telephone conversation with author. 

80 General Accounting Office, Medicare Statistics on the Part B Administra¬ 
tive Law Judge Hearings Process. (Washington, D.C.: November 1989). 


195 




a decision. SSA has targeted shortening the length of 
time for review and appeal a necessary reform. 81 

Until recently, the backlog of HMO cases awaiting 
HCFA reconsideration was substantial, the average 
case taking one to one-and-a-half years to get through 
the reconsideration stage. As a result of Levy v. 
Bowen , 82 however, HCFA has agreed to require 
HMOs to limit the time allowed for review to up to 
60 days after a beneficiary files a request for review. 
Also, NDG, the organization with which HCFA has 
contracted to review all HMO denials and make re¬ 
consideration decisions, has been working to reduce 
the backlog of cases. By October 1989, NDG had 
cleared up all but 21 of the 1988 backlog of 562 cases, 
in addition to processing about 75 percent of the 1989 
cases. 83 

Circumstances Requiring Speedy Decisionmaking— 
Because of the importance of rendering a Medicare 
decision immediately prior to hospital discharge, the 
PRO review and reconsideration process is designed 
to move unusually quickly. Under certain circum¬ 
stances, this decision might be reversed at a later date. 

The extended time period for claims decisions often 
adversely affects providers as well as beneficiaries. 
Consequently, regarding Medicare Part A SNFs and 
HHAs, both beneficiaries’ advocates and providers 
have recommended that HCFA develop a mechanism 
for initial claims determination that, like the PRO 
process, would be speedy and performed by qualified 
experts. 84 An advisory commission on home health 
care has recommended an expedited appeal to an in¬ 
dependent entity at the request of the beneficiary or 
provider. 85 This would alleviate concerns about bene¬ 
ficiaries or providers having to expend funds in ad¬ 
vance of decisions about reimbursement and enable 
beneficiaries, their families and providers to make 
more realistic care-related decisions. 


Access to Information on Which 
Determinations are Based 

Determinations denying benefits for reasons related 
to medical condition or level of care are based on 
whether the beneficiary’s condition is considered as 
covered within the policies of the benefit program. A 
beneficiary cannot effectively argue that her/his con¬ 
dition or circumstance is covered by benefit program 


81 Disability Advisory Committee, Report, 2. 

82 CD CA, June 20, 1989. 

83 Sylvia Hendel, conversation with author. 

84 Charles C. Hulin, conversation with author; Susan Pettey, conversation 
with author. 

85 Advisory Committee on Medicare Home Health Care, Report to Con¬ 
gress and Health Care Financing Administration, July 1, 1989. 


policies or criteria unless these are known to the ben¬ 
eficiary. In order to prepare a case adequately, the 
beneficiary needs access to any information about 
benefit program criteria or policies that might influ¬ 
ence the benefit determination. 

Problems in Obtaining Critical Information— 

Dissastisfaction with the existing level of benefit pro¬ 
gram accountability to beneficiaries regarding adverse 
determinations or publication of policies that might 
adversely affect beneficiaries is widespread. Critical 
information frequently unavailable to beneficiaries and 
their representatives or difficult to obtain includes: 

• basic manuals containing detailed operating in¬ 
structions for claims examiners and reviewers 

• screens and other criteria used to eliminate bene¬ 
ficiaries with certain types of conditions or situa¬ 
tions from consideration for benefits 

• internal program guidelines or informal di¬ 
rectives to individuals making or reviewing 
claims determinations 

• major program-wide decisions that have the 
effect of general policy statements, but are not of¬ 
fered for public comment prior to implementation 

Although all benefit programs have been criticized 
to some degree for inaccessibility of critical informa¬ 
tion, Medicare appears to be the most problematic. In 
part, this may be because of the wide latitude given 
contractors to interpret Medicare rules in the review 
and appeals process. In addition, the decentralized 
administration of the Medicare program gives rise to 
inconsistent interpretations of policies and directives, 
and makes careful monitoring of the day-to-day 
aspects of the review and appeal process virtually 
impossible. 

Program Rationale for Limiting Access to Informa¬ 
tion—The Administrative Procedure Act 86 requires 
federal administrative agencies to ensure that: the 
public be given an opportunity to comment on pro¬ 
posed rules; the agency consider the comments; and 
final rules be published prior to implementation. The 
purpose of this provision is to encourage public par¬ 
ticipation and fairness to parties affected by the pro¬ 
posed rules, and to increase public acceptance of the 
validity of the new policies. 87 

The Administrative Conference of the United 
States has consistently urged HHS to provide greater 
opportunity for public comment on its policies for 

88 5 U.S.C., Sec. 553. 

87 T.S. Jost, “Administrative Law Issues Involving Medicare Utilization 
and Quality Control PRO Program: Analysis and Recommendation,” Ohio 
State Law Journal, 50, (1) (1989): 10. 


196 




making coverage and payment determinations. 88 The 
rationale of benefit programs for resorting instead to 
manual transmittals, program instructions and con¬ 
tracts that are not made available to the general 
public, may be that the Administrative Procedure Act 
rulemaking procedures have become too burdensome 
and time-consuming for programs with rapidly chang¬ 
ing needs and circumstances. The legal justification 
for by-passing this statute is that technically its lan¬ 
guage does not encompass these types of materials. 89 

Recent Case Law—A number of cases examine 
issues relating to the promulgation of manuals and 
other limited circulation materials used in making 
claims-related decisions. Through these decisions the 
courts may be imposing a kind of accountability on 
benefit programs. 

Reliance on Unpublished Policies —In Duggan v. 
Bowen, 90 the court found that the Medicare program 
had promulgated a policy by letter, the effect of 
which was to limit reimbursement for part-time or 
intermittent home care under Part A. The policy itself 
violated the Medicare Act and the manner of its pro¬ 
mulgation violated the Administrative Procedure Act. 
HCFA had minimal regulations addressing the provi¬ 
sion of part-time or intermittent care. Instead it relied 
on policy statements found in manuals and transmit¬ 
tals, none of which had been subject to public notice 
and comment. 

The court pointed out that ALJs, placing more 
weight on the statute and regulations than on internal 
directives, have ruled that Medicare should provide 
coverage in the type of situation litigated in this case. 

In response to the decision in Duggan v. Bowen, 
HCFA, in consultation with the National Association 
for Home Care, has revised its manual of directives to 
fiscal intermediaries to amend and clarify its policy 
regarding payment for part-time or intermittent 
care. 91 

“Rules of Thumb”—Courts also have criticized 
PROs for using arbitrary “rules of thumb” to deny 
benefits when HCFA’s published bulletin for PROs 
required individualized assessments of each patient’s 
needs in determining eligibility. In Hooper v. Bowen , 9 2 
the court indicated that a particular guideline was not 
meant to create an irrebutable presumption of 
noncoverage, but merely to indicate the possibility of 
noncoverage. In all cases where denial is possible, 
PRO physicians are expected to consider the indi¬ 


88 E.g. Recommendation 89-1, June 12, 1989. 

89 T.S. Jost, ''Administrative Law Issues," 10. 

90 691 F.Supp. 1487 (D.D.C. 1988). 

91 T.S. Jost, “Administrative Law Issues,” 10. 

92 U.S.D.C., D CT, July 20, 1989. 


vidual facts and circumstances of the patient’s 
medical condition and grant coverage whenever 
hospitalization is medically necessary. 

The illegality of “rules of thumb” were at issue in 
Fox v. Bowen, 90 a case in which a fiscal intermediary 
denied benefits based on blanket unpublished rules not 
authorized by statute or regulation. The court forbade 
fiscal intermediaries and providers from making deci¬ 
sions about beneficiary eligibility for Medicare bene¬ 
fits based on arbitrary rules of thumb. The fact that 
employees of the fiscal intermediary were avail¬ 
able to discuss individual coverage decisions with the 
beneficiary’s service provider did not amount to an in¬ 
dividual assessment of the beneficiary’s case. 

Utilization Screens —When HCFA required a carrier 
to develop utilization screens for Medicare Part B 
claims, the court reiterated that screens should be 
used only as guides, and were not to preclude indi¬ 
vidual assessment of the beneficiary’s condition. 94 

Secret Directives —Sometimes benefit programs base 
claims determinations on unpublished policies or crite¬ 
ria. In Bowen v. City of New York, 95 the Supreme 
Court held that DI and SSI recipients were denied 
due process when a state agency denial of benefit 
claims was based on an unpublished policy contrary 
to published SSA policy. The policy had never ap¬ 
peared in the Federal Register, but was implemented 
through internal memoranda and other bureaucratic 
devices. 

The Court said that failure to make the policy, 
which went to the heart of disability determinations, 
known to beneficiaries denied them a fair decision. 
The Court made it clear, however, that benefit pro¬ 
grams cannot be expected to publish every directive 
which may affect benefit determinations. 

In addition to violating the Constitution, initial de¬ 
terminations based on secret sources impose unneces¬ 
sary burdens on appellate level decisionmakers and 
additional expense on the review and appeal system. 
For example, in DI, SSI and Medicare cases, where 
ALJs are required to make decisions based solely on 
law and regulations, reversal of denials justified on 
any other grounds is virtually inevitable. One ALJ 
stated that reliance on secret sources for lower level 
decisionmaking requires the ALJ to do two jobs— 
her/his own and that of the earlier decisionmaker. 96 


93 656 F.Supp. 1236 (DCT 1987). 

98 Vorster v. Bowen, 709 F.Supp. 934 (CDCal. (1989). 

95 476 U.S. 467 (1985). 

98 Ronald G. Bemoski, Secretary, Association of Administrative Law 
Judges, telephone conversation with author, January 4, 1990. 


197 




For beneficiaries who accept determinations of denial 
without further question, the result of a denial based 
on secret sources could be devastating. 

Congressional and Administrative Action—Congress 
has expressed a commitment to the importance of pro¬ 
viding for public comment on major benefit program 
policy statements and administrative directives. In 
1987, Congress enacted certain provisions requiring 
HCFA to publicize more of its policies governing 
Medicare. For example, HCFA must promulgate sub¬ 
stantive program rules, policies, requirements, and 
changes in the scope of benefits, or beneficiary eligi¬ 
bility as regulations. 97 As regulations, these will re¬ 
quire a request for public notice and comment. 98 

In addition, the statute requires the publication and 
regular updating of a list of all manual instructions, 
guidelines of general applicability, interpretative rules, 
and statements of policy that have not been promul¬ 
gated as regulations. 99 Also, the contractual relation¬ 
ship between HCFA and private organizations to 
which it has delegated claims determination, and 
review and appeal functions continues to result in ex¬ 
empting many significant substantive policies and di¬ 
rectives from the requirement of public scrutiny. The 
rationale is that the Administrative Procedure Act 
does not apply to the internal workings of these 
organizations. 100 

Medicare Home Health Care Denials—A Case 
Study—During FYs 1986 and 1987, there was a dra¬ 
matic increase in the number of denials of Medicare 
home health care claims. Responding to numerous 
complaints from home health care providers, physi¬ 
cians and senior citizen groups, Congress, in the 
Medicare Catastrophic Coverage Act of 1988, man¬ 
dated the creation of an Advisory Committee on 
Medicare Home Health Care to determine the reasons 
for the denials and to recommend reforms to Con¬ 
gress and HCFA. Among the findings of the com¬ 
mittee were several relating to the impact of HCFA’s 
reliance on informal communication of policies and 
program directives, and to the decentralization of de¬ 
cisionmaking on the Medicare Part A claims, review 
and appeal processes. 101 

The committee indicated that even the attempt to 
collect documentation necessary to implement policy 
and program changes often was futile because very 
little of the critical information was recorded in any 


97 42 U.S.C., Sec. 1395hh(a)(2). 

98 42 U.S.C., Sec. 1395hh(bXl). 

99 42 U.S.C., Sec. 1395hh(c)(l). 

100 See, e.g. American Hospital Association v. Bowen. 834 F.2d 1037 (D.C. 
Cir. 1987), re protection of HHS from obligation to seek comment on policies 
embodied in contracts with PROs. 

101 Advisory Committee on Medicare Home Health Care, Report 10-12. 


manner. 102 The frequent changes in HCFA policy re¬ 
garding payment of home health care claims generally 
were communicated to fiscal intermediaries respon¬ 
sible for claims payment decisions as instructions or 
informal directives. 103 

The committee also found considerable inconsist¬ 
ency among fiscal intermediaries in the manner of 
processing, reviewing and denying claims, and in the 
application of Medicare coverage criteria. When fiscal 
intermediaries initiated new coverage criteria that re¬ 
sulted in an increase of claims denied, they failed to 
provide prior notification to providers. 104 

The committee made several recommendations to 
Congress and HCFA regarding claims review and 
appeal decisions. Two that relate to improving com¬ 
munication regarding the reasoning behind benefit-re¬ 
lated decisions are that there should be: 

• Advance written notice and an opportunity to 
comment before proposed program and policy 
changes are implemented and 

• Prospective and timely dissemination of policies 
or related communications; policies should not be 
subject to regional [HCFA] interpretation prior 
to dissemination 105 


Right to a Determination Based on an 
Adequate Record 

Files containing inadequate information about the 
validity of beneficiaries’ claims (records) offer signifi¬ 
cant basis for reversal of claims determinations in 
many benefit programs and are probably the major 
reason for delay in the review and appeal process. 
Records may be inadequate because established proce¬ 
dures for developing medical, functional or other rele¬ 
vant information about beneficiaries are deficient. 
When procedures themselves are acceptable, person¬ 
nel may not be adequately trained or monitored, or 
provided with appropriate work incentives. 

Benefit Program Practices—The Constitution re¬ 
quires benefit programs to base determinations on ac¬ 
curate, complete and timely information. The rate of 
reversals on appeal indicates, however, that in the 
earlier stages of review, programs frequently do not 
develop records that meet this standard. Because most 
beneficiaries do not appeal claims determinations at 
all, and a declining number appeal them at each stage 
of the review and appeal process, many beneficiaries 


102 Advisory Committee on Medicare Home Health Care, Report 22. 

i°3 Advisory Committee on Medicare Home Health Care, Report 49. 

104 Advisory Committee on Medicare Home Health Care, Report 64. 

105 Advisory Committee on Medicare Home Health Care, Report 12. 


198 




are receiving determinations based on inadequate in¬ 
formation about their claims. Practices of benefit pro¬ 
grams illustrate some systemic problems resulting 
from adequate claims records. 

Department of Veterans Affairs—Beneficiaries’ rep¬ 
resentatives complain that the initial claims determina¬ 
tion process within DVA is deficient because the 
records on which the Rating Board makes its deci¬ 
sions frequently are incomplete. For example, DVA 
staff may not order medical examinations as part of 
the initial process, so that these must be ordered at 
later stages. In addition, unrepresented veterans fre¬ 
quently do not assert their claims beyond ini tial 
denial, and so are inadequately served by the 
system. 106 

Another obstacle to developing adequate records 
for DVA disability proceedings is the difficulty in 
getting medical records from the various medical in¬ 
stallations of DVA where beneficiaries are examined 
and treated. 107 

Social Security Administration—Witnesses testifying 
before an SSA committee on disability claims stated 
that SSA personnel are not sufficiently active in initial 
development of claims records. They also criticized 
SSA staff for not communicating effectively with 
beneficiaries, particularly those who do not speak 
English, about the evidence required to prove their 
claims. The Committee recommended that SSA 
affirmatively assist beneficiaries by insuring pursuit of 
every appropriate method of securing evidence to 
support their claims. 108 

Other testimony alleged that, because claims devel¬ 
opment standards are lacking, there is no uniformity 
in decisionmaking by state DDSs. Records at the 
DDS level may be problematic because of: inappro¬ 
priate medical evidence, incomplete evidence, failure 
of staff to follow up on acquiring requested evidence, 
and poor quality evidence. The Committee recom¬ 
mended that SSA standardize requirements for a 
complete record and hold state level employees re¬ 
sponsible for complying with these requirements. 109 

Another concern is the appropriateness of the evi¬ 
dence gathered for the record. Beneficiaries’ repre¬ 
sentatives criticize the heavy reliance on traditional 
medical evidence and physicians’ opinions in DI and 
SSI determinations. 110 Even though the effects of 

108 John A. Sommer Jr. and Philip R. Wilkerson, conversation with 

aUt io7 j h. Spindle, Jr. and Robert Yurgal, conversation with author; John A. 
Sommer Jr. and Philip R. Wilkerson, conversation with author. 

108 Disability Advisory Committee, Report, 9. 

109 Disability Advisory Committee, Report, 9. 

no Eileen Sweeney, conversation with author; Ayn Crawley, conversation 
with author. 


chronic disability are observed most frequently by 
family members, nurses or personal care attendants, 
SSA regulations indicate that only physician in¬ 
formation is acceptable as medical information about 
beneficiaries. 111 

Medicare—Problems of adequacy of claims records 
in Medicare are more difficult to evaluate. Much of 
the evidence on which determinations are based is 
technical in nature. In addition, HCFA has little 
direct control over the initial claims process and the 
early stages of review. NDG, the contractor provid¬ 
ing reconsideration decisions in HMO cases, has indi¬ 
cated to HCFA that the principal reason for delays in 
making these determinations has been the need to go 
back to the HMOs for additional material in order to 
complete claims records. 112 

Right to Make a Verbal Statement or 
Argument in Front of the Decisionmaker 

Both beneficiaries’ advocates and benefit program 
administrators believe that face-to-face communica¬ 
tion of some sort between beneficiaries and deci¬ 
sionmakers as early as possible in the review and 
appeals process would be efficacious. 113 Some believe 
that if beneficiaries are given an early opportunity to 
present their side of the story directly to decision¬ 
makers, their levels of satisfaction even with adverse 
decisions, would rise substantially. 114 Other results 
might be fewer appeals and less strain on benefit pro¬ 
gram administrative apparatus. Although viewing a 
beneficiary in the flesh may on occasion have a nega¬ 
tive impact on a decisionmaker, in-person hearings are 
known to improve vastly beneficiaries’ chances 
for favorable determinations. In Medicare Part B ALJ 
determinations, for example, beneficiaries choosing 
on-the-record reviews received favorable decisions in 
26 percent of the cases, while those choosing in- 
person hearings received favorable decisions in 40 
percent. 115 

In-Person Reviews in Benefit Programs—The avail¬ 
ability of in-person administrative reviews is built into 
all benefit programs, although the stage in the process 
at which they occur, and the formality of the pro¬ 
ceedings, vary. These reviews are not automatic, but 
must be requested by the beneficiary. Generally, the 
time span is significantly longer for in-person hearings 


111 20 CFR 404.1513. 

112 Carlos Zarabosa, conversation with author. 

113 Jean Hinckley, conversation with author; Michael Parks, telephone 
conversation with author; Eileen Sweeney, conversation with author, Disabil¬ 
ity Advisory Committee, Report, 18. 

114 Jean Hinckley, conversation with author, Ayn Crawley, conversation 
with author. 

115 General Accounting Office, Part B Hearings Process. 


199 




than on-the-record reviews; also the expense to all 
parties is greater. 

All benefit programs provide the opportunity for 
hearing at the final level of appeal within the agency, 
but this may be contingent on the amount in contro¬ 
versy. For all of the HHS programs, in-person hear¬ 
ings occur the ALJ level. For DVA, they are before 
the BVA. Medicare Part B procedures provide, as 
well, for a carrier fair hearing at the reconsideration 
level; Medicare HMOs at the initial review level; 
DVA for hearings at all stages; and SSA for a hearing 
prior to termination, for DI beneficiaries only. 

Despite the generally acknowledged value of the 
in-person hearing, few beneficiaries take advantage of 
it. Although, in DI and SSI cases, 90 percent of ALJ 
proceedings are in-person hearings, 116 this is unusual 
among benefit programs. 

The HCFA Carriers Manual indicates that carrier 
staff should explain to beneficiaries requesting a car¬ 
rier reconsideration that, although they are entitled to 
an in-person hearing, an on-the-record decision based 
on a full review of the record is faster and less 
costly. 117 Beneficiaries’ representatives indicate that 
other agencies may direct staff to encourage benefici¬ 
aries to select on-the-record hearings for similar rea¬ 
sons. 118 In DVA programs, for example, although 
hearings are available at all stages, relatively few 
actually are held. Hearings before the BVA take 
place in Washington, D.C., and veterans must appear 
at their own expense. BVA traveling panels are 
infrequent, thereby delaying the appeal process 
significantly. 

Recently DVA, pursuant to a consent decree, es¬ 
tablished an intermediate level panel of hearing offi¬ 
cers that hear cases at the regional offices. These 
hearing officers cannot have participated in the initial 
decision. 119 This should increase the number of hear¬ 
ings held. DVA, however, is not currently publicizing 
the availability of this opportunity. 120 

Involving the Decisionmaker—It is essential that 
early in-person communication between beneficiaries 
and benefit programs as part of the review and appeal 
process involve the decisionmaker or all members of a 
decisionmaking team. 121 This communication need 


116 Jean Hinckley, conversation with author. 

117 Medicare Carriers Manual, Part 3, Claims Process, Revision 1291, sec. 
12105, February 1989, 12-21. 

118 Eileen Sweeney, conversation with author. 

119 Semenchuk v. Walters, No. 84-C-312, U.S.D.Ct., ND ILL (March 18, 
1985). 

120 John A. Sommer Jr. and Philip R. Wilkerson, conversation with 
author. 

121 Jean Hinckley, conversation with author; Ayn Crawley, conversation 
with author. 


not be in the context of a formal hearing. It might be 
a prehearing conference as suggested by the Disability 
Advisory Committee 122 or an interview as part of the 
initial review process, as recommended by the 
Administrative Conference. 123 

Impact of Face-to-Face Interviews—A recent GAO 
study determined that the face-to-face interviews that 
ALJs conduct with DI and SSI beneficiaries are 
major factors in reversal of DDS denials in on-the- 
record reconsiderations. At the time of the study, 
ALJs were reversing DDS decisions in over 60 per¬ 
cent of cases receiving an ALJ hearing. For several 
categories of beneficiaries the rate was between 70 
and 100 percent. 124 GAO recommended that the Sec¬ 
retary of HHS direct SSA to initiate a demonstration 
project that would include face-to-face interviews for 
selected beneficiaries at the reconsideration stage. The 
purpose of the recommendation was to allow DDSs 
to approve some claims that would otherwise be ap¬ 
proved by ALJs, and to better document DDS deci¬ 
sions later reviewed by ALJs. 125 

The Disability Advisory Committee has identi¬ 
fied the absence of face-to-face communication be¬ 
tween beneficiaries and decisionmakers as a significant 
factor undermining the effectiveness of the hearing 
and appeal process in SSA. It has recommended more 
involvement between DDSs and beneficiaries in pre¬ 
paring claims files for initial review, and face-to-face 
hearings at reconsideration. 126 The Committee stated 
that “it is not enough that individuals receive ‘fair’ de¬ 
cisions,” and urged that SSA “endeavor to ensure 
that applicants also view these decisions as fair and 
proper based on the evidence.” 127 

Telephone Hearings—The use of high technology 
that lowers costs and also satisfies frail or disabled 
beneficiaries is an inevitable outgrowth of a legitimate 
search for ways to provide fair hearings and also con¬ 
tain the costs of administering large scale benefit pro¬ 
grams. Beneficiaries’ advocates and administrators 
caution against heavy reliance on using the telephone 
as an alternative to in-person hearings. They contend 
that, even though it may be difficult for chronically 
disabled, ill or elderly individuals to get to the hear¬ 
ing location, the advantages of the in-person hearing 
outweigh the difficulties. 128 


122 Disability Advisory Committee, Report, 18. 

123 Frank S. Bloch, Report and Recommendations on the Social Security 
Administration's Administrative Appeal’s Process (Administrative Conference of 
the United States, 1989), 130. 

124 General Accounting Office, Social Security/Selective Face-to-Face Inter¬ 
views with Disability Claimants Could Reduce Appeals, (Washington, D.C.: 
April 1989), 3. 

125 General Accounting Office, Face-to-Face Interviews, 3-4. 

126 Disability Advisory Committee, Report, 10. 

127 Disability Advisory Committee, Report, 8. 

128 Eileen Sweeney, conversation with author; Jean Hinckley, conversa¬ 
tion with author. 


200 




Congressional and Administration Interest —In the 
Omnibus Budget Reconciliation Act of 1987, 129 Con¬ 
gress raised the question of whether telephone hear¬ 
ings can be conducted effectively and efficiently in a 
Medicare environment. Medicare beneficiaries con¬ 
tinue to have the option to select telephone hearings 
at the carrier level. These must be conducted accord¬ 
ing to specific procedures set out in the Medicare 
Carriers Manual. 130 

The Inspector General of HHS has studied the le¬ 
gality and viability of expanding telephone hearings to 
the ALJ level and has concluded that such hearings 
are legal, provided they employ adequate safeguards 
of due process. Furthermore, the Inspector General 
found that: the Medicare Part B telephone hearings 
complied with due process; beneficiaries using these 
hearings generally perceived them to be fair; and, 
most Medicare issues could be handled effectively by 
telephone. 131 

Reasons for Concern —Critics of providing telephone 
hearings for the population generally served by bene¬ 
fit programs agree that these should be an option for 
individuals who prefer the telephone, but stress that, 
without an in-person hearing, the decisionmaker 
cannot see the beneficiary’s demeanor. In addition, 
they describe the average beneficiary, particularly of 
DI or SSI, as unused to high technology and prob¬ 
ably frightened of it. 132 Others suggest that telephone 
hearings might be appropriate if the advocate and the 
decisionmaker communicate without the beneficiary’s 
participation in the conversation. 

Linguistic studies of the different impacts of face- 
to-face and telephone communication, indicate that, in 
virtually all instances, face-to-face conversation 
provides the parties with vastly more effective and 
comprehensible communication. This is because 
face-to-face communication involves more clues to 
meaning than just speech. Gestures, eye gaze, body 
orientation, and touching are all available to in¬ 
dividuals engaged in face-to-face conversation. These 
findings indicate that trained administrators with ex¬ 
perience in using telephones for business have a dis¬ 
tinct advantage over beneficiaries, most of whom do 
not possess this skill. In congressional testimony, the 
Chairman of the Georgetown University Department 
of Linguistics listed the essential characteristics of ef- 

129 Office of Inspector General, U.S. Department of Health and Human 
Services, Appeals by Telephone: Appellant Reactions and Implications for Ap¬ 
peals Processing (U.S. Department of Health and Human Services, June 1988), 
iL 

130 Medicare Carriers Manual Part 3, Claims Process, Revision 1291, sec. 

12017, February 1989, 12-33. 

1S1 Office of Inspector General, Appeals by Telephone. 

132 Eileen Sweeney, conversation with author; Jean Hinckley, conversa¬ 
tion with author. 


fective administrative adjudicatory hearings, con¬ 
ducted by telephone as: 

• the ability of both parties to be as explicit ver¬ 
bally as they normally would be in face-to-face 
dialogue 

• the necessity that both parties speak so that all 
jargon, dialect, age and gender differences are 
removed 

• recognition that elderly beneficiaries may be 
hard-of-hearing 

• the ability of both parties to maintain the same 
style of language—consultative, formal or casual 

• the necessity that both parties are equally at ease 
with the culture of the telephone. 

His testimony continued with the thought that this 
type of hearing becomes more complex with each ad¬ 
ditional participant in the telephone hearing. 133 

Right to a Hearing Prior to 
Denial or Termination of Benefit 

The law regarding termination of benefits without a 
hearing bears directly on who pays during the period 
of adjudication of the validity of an outstanding 
claim. Under the facts of Mathews v. Eldridge 134 the 
beneficiary pays. Under Goldberg v. Kelly 135 the gov¬ 
ernment pays. Under Medicare Part A, the provider 
pays. Until recently changed by legislation, when a 
recipient of DI was terminated from benefits, an on- 
the-record review was considered sufficient so long as 
a hearing was available within a reasonable amount of 
time after termination. The Supreme Court’s justifica¬ 
tion for this holding was that DI recipients generally 
are terminated from benefits because they are able to 
return to work. 136 Consequently, their reliance on the 
DI benefit is not as great as a welfare recipient’s reli¬ 
ance on public benefits. 

In more recent cases, courts have been drawing dis¬ 
tinctions. In Martinez v. Bowen, 137 for example, the 
District Court found that Medicare beneficiaries were 
entitled to a pretermination hearing and to continued 
receipt of benefits until a determination was made. Its 
rationale was that as part of a class disadvantaged by 
disability, illness and poverty, these beneficiaries were 
more like welfare than DI recipients. Medicare pro¬ 
vided them with the means to live while hearings 


133 Testimony of Roger W. Shuy, Ph.D., Georgetown University, before 
the U.S. Senate Committee on Governmental Affairs, June 1988. 

134 Mathews v. Eldridge, 424 U.S. 319 (1975). 

135 Goldberg v. Kelly. 397 U.S. 259 (1969). 

136 Mathews v. Eldridge, 424 U.S. 319 (1975). 

137 Martinez v. Bowen, 655 F.Supp. 95 (DCNM, 1986). 


201 




were pending. 138 Several benefit programs have reg¬ 
ulations protecting beneficiaries during the pendency 
of a benefit termination proceeding. Under current 
law, DI and SSI beneficiaries receive payment during 
the pendency of a termination hearing through the 
ALJ hearing stage. If the beneficiary is denied, over¬ 
payment of benefits are supposed to be returned. As a 
matter of program practice, this rule is rarely en¬ 
forced. DVA permits a beneficiary receiving termina¬ 
tion notice 60 days to appeal before benefits are cut 
off. 


Right to a Determination by an 
Impartial Decisionmaker 

The separation of the review and appeal determina¬ 
tion from benefit program influence is a critical aspect 
of due process that has posed dilemmas for benefit 
programs. Programs provide for impartial determina¬ 
tions in various ways, some of which are more effec¬ 
tive in achieving objectivity and independence from 
the program than others. All benefit programs, for ex¬ 
ample, require reconsideration decisions or second- 
level reviews to be done by individuals not involved 
in the initial decision or first-level review. The rela¬ 
tionship of the reviewers themselves to the program 
may, however, be problematic. 

The implementation of an independent decisionmak¬ 
ing function within benefit programs raises many 
issues. This section examines three issues that have 
arisen in the context of specific programs—the inde¬ 
pendence of the institution of the ALJ within SSA; 
the use of private contractors to make review and 
appeal determinations on behalf of Medicare; and, the 
creation of a Court of Veterans Appeals independent 
of DVA. 

The Independence of the ALJ—The Administrative 
Procedure Act mandates the independence of ALJs in 
making benefit-related decisions. Recognizing this, 
ALJs stress the importance of benefit programs’ re¬ 
specting their professionalism and objectivity. The 
programs, concerned about containing costs of both 
benefit payments and the review and appeal process, 
sometimes institute policies or practices perceived as 
violating the intent of the Administrative Procedure 
Act. In recent years, the status of the ALJ within 
SSA has been the subject of congressional concern 
among beneficiaries’ representatives, GAO, expert 
commissions and the ALJs themselves. Legislation 
currently being considered in Congress would either 
separate the office of ALJ from SSA and HHS en¬ 
tirely by creating an independent ALJ commission 


138 Martinez v. Bowen, 655 F.Supp. 95 (DNM, 1986). 


(HR 791), or establish an Office of Chief ALJ that 
would report directly to the Secretary of HHS 
(S. 1571). 

Related legislation proposing the separation of SSA 
from HHS also has spurred the movement toward 
establishing an independent office of ALJ. Critics fear 
that if SSA is no longer in HHS, SSA’s power over 
the office of the ALJ would be even greater than 
at present. Another concern is that HCFA, which is 
required to use SSA ALJs to perform appellate 
hearings and reviews for Medicare, would seize the 
opportunity created by the separation of SSA to es¬ 
tablish an office of ALJ within its own agency. 

Because ALJs function within the administrative 
rather than the judicial sphere, there is inherent ten¬ 
sion between them and the agencies they serve about 
the limits of their authority to render appellate deci¬ 
sions. The legislative proposals would establish insti¬ 
tutional distance between the ALJ and SSA or 
HCFA. The proposals are motivated by concern 
about documented practices of these agencies whose 
result has been, or could be, to restrict the ALJs’ 
abilities to function as independent decisionmakers. 

Within SSA and HCFA, past and current policies 
and practices and the complaints made about them 
include: 

• Establishing a “pool” system to staff the ALJ 
office so that attorneys and paralegals preparing 
cases no longer report directly to the ALJ but to 
the management of SSA, thereby making ALJs 
accountable for decisionmaking but removing 
from them the authority over critical aspects of 
the appeal process 139 

• Designating certain ALJs to manage other ALJs 
and supervise the manner in which they process 
cases, a function not protected by the Adminis¬ 
trative Procedure Act 140 

• Instituting individual performance reviews of 
ALJs, focused on rates of reversal of lower level 
denials, followed by attempts to modify certain 
ALJs’ behavior or taking punitive measures 
against them 141 

• Not enforcing strict requirements that ALJs take 
cases on a rotational basis, as required by the 
Administrative Procedure Act, with the result 
that it becomes possible for SSA to select judges 
to hear certain cases 142 


139 Association of Administrative Law Judges, Inc., Statement to the Dis¬ 
ability Advisory Committee, Social Security Administration, May 1, 1989. 

140 Association of Administrative Law Judges, Inc., Statement. 

141 Association of Administrative Law Judges, Inc., Statement. 

142 Association of Administrative Law Judges, Inc., Statement. 


202 




• Limiting the number of ALJs that hear Medicare 
Part B appeals to selected individuals, resulting in 
creating administratively a corps of HCFA ALJs 
that Congress has expressly refused to establish 
legislatively 143 

• Countenancing the issuance of ex parte directives 
to ALJs that effectively instruct them as to how 
to decide a case 144 

• Attempting to influence the already overbur¬ 
dened SSA Appeals Council to review ALJ re¬ 
versals of lower level denials in Medicare cases, 
in direct conflict with the law that authorizes the 
Appeals Council only to take cases appealed by 
beneficiaries or on its own initiative 145 

Whether or not SSA’s or HCFA’s reasons for institut¬ 
ing the policies and practices described are as attrib¬ 
uted to them by critics, the pervasive complaints call 
into question the effectiveness of the ALJ system as it 
currently functions. 

Delegation of Review Functions in Medicare—The 

legality and appropriateness of delegating constitu¬ 
tionally required review and appeal functions to 
private organizations is controversial. Medicare’s dele¬ 
gation of all of the review and reconsideration func¬ 
tions of its various benefit programs to private sector 
organizations raises important questions about inde¬ 
pendence of the review process. Each of these 
private organizations is accountable to HCFA 
for its performance. Although the Supreme Court has 
found that such arrangements are not per se 
violations of due process, it has indicated that an 
actual conflict of interest will result in unconstitu¬ 
tional determinations. 146 

Medicare Parts A and B— The carriers and fiscal 
intermediaries that perform reviews and reconsider¬ 
ations under Parts A and B function as agents of 
HCFA. They do not themselves provide health care 
services or benefits to Medicare beneficiaries that 
would conflict with their ability to make fair decisions 
about Medicare claims. But through their contracts 
with Medicare, they could be subject to inappropriate 
influence. For example, the contracts contain provi¬ 
sions that authorize Medicare to evaluate the effec¬ 
tiveness of carrier or fiscal intermediary review and 
appeal procedures. The criteria against which the 
evaluation is made, however, are not readily accessi¬ 
ble to public scrutiny. What constitutes “good per¬ 
formance” from the program’s point of view is not 

143 Plaintiff's Motion for Injunction and Declaratory Relief, Kitick v. Sulli¬ 
van (Civl Action No. N89-494, U.S.D.Ct, D CT, October 4, 1989). 

144 Plaintiff's Motion for Injunction and Declaratory Relief, Kitick v. Sulli- 

VQfL 

145 Congressional Record, Statement of Sen. David Pryor, 101st Cong., 1st 
Sess., 135 (109), pan II, August 4, 1989. 

143 Schweiker v. McClure, 456 U.S. 188 (1982). 


generally known. Contractual or informal perform¬ 
ance quotas or goals, or more subtle means of direct¬ 
ing the outcomes of benefit determinations, are 
difficult for beneficiaries’ representatives to monitor. 
But failure to pass a quality review of performance 
under the contract subjects the contractor to possible 
discontinuance of the contractual relationship. 

The independence of the PROs has been challenged 
for different reasons. Some critics consider that it is 
difficult for physicians to evaluate fairly the medical 
decisions of other physicians for fear that their own 
judgment may be similarly challenged at some future 
time. 147 Others consider that the PROs cannot be ob¬ 
jective because they are paid by Medicare, and that 
HCFA might put pressure on physicians to increase 
the number of claims denials. 148 

Medicare HMOs —The role of HMOs in Medicare 
review determinations could become particularly 
problematic. HMOs providing health care services to 
beneficiaries are authorized to make claims decisions 
and could contain costs by denying legitimate claims, 
particularly where these are marginal. Beneficiaries 
could perceive review by the same organization, even 
if done by individuals not involved in the initial deci¬ 
sion, as unfair. HCFA has given HMOs substantial 
latitude in developing their own review and appeal 
procedures, and does not maintain statistics on re¬ 
quests for HMO review or on their rates of denial and 
allowance of initial claims. 149 Recognizing the poten¬ 
tial for conflict of interest, HCFA regulations require 
that all HMO reconsiderations resulting in denial of 
claims must be forwarded to HCFA for review. 150 

The Creation of the Court of Veterans Appeals— 

Review and appeal procedures functioning entirely 
within the benefit program or its parent agency may 
not adequately insure independent decisionmaking re¬ 
garding benefits. Provision of some sort of judicial 
review of most actions of administrative agencies is 
accepted as required by the constitutional separation 
of powers doctrine. 

Until recently, DVA and its predecessor, the Veter¬ 
ans Administration, had not provided for judicial 
review of benefit decisions. In 1988, after a decade of 
debate, Congress enacted the Veterans’ Judicial 
Review Act, 151 authorizing the establishment of an 
independent court, the Court of Veterans Appeals, to 
review decisions of BVA. Prior to that time, benefici¬ 
aries of veterans’ benefits could only appeal denials 


147 Richard Husk, perception referred to in conversation with author. 

148 Alan K. Kaplan, perception referred to in conversation with author 
(Washington, D.C.: November 15, 1989). 

149 Carlos Zarabosa, conversation with author. 

150 42 CFR 417.620(bX2). 

‘*‘38 U.S.C., Sec. 4063, et seq. 


203 








within DVA. 152 Unlike DI benefits which have 
always been considered entitlements to those who are 
eligible, until recently, veterans’ benefits were consid¬ 
ered discretionary. Consequently, Congress was under 
no obligation to establish judicial review of DVA ac¬ 
tions. In 1981, DVA’s General Counsel wrote an 
opinion stating that “benefits are gratuities bestowed 
by the Government under whatever conditions it 
chooses to impose.” 153 

BVA, the final administrative appeals body, had no 
external checks on its actions. If BVA chose not to 
resolve a difficult issue or decide a complicated case, 
there was no effective means of forcing it to do so. At 
the same time, it was, and still is, considered subject 
to pressure from DVA regarding decisions in politi¬ 
cally controversial cases. 154 Some beneficiary repre¬ 
sentatives argue that, even with the creation of the 
court, veterans continue to be denied truly independ¬ 
ent determinations at the agency level. 155 Prior to the 
enactment of the Veterans’ Judicial Review Act, the 
American Legion lobbied for many years for the cre¬ 
ation of an administrative appeal body totally inde¬ 
pendent of DVA, to replace the existing placement of 
BVA within DVA. 

The Court of Veterans Appeals was established 
with the expectation that it would provide an inde¬ 
pendent perspective on decisionmaking in DVA pro¬ 
grams including disability benefits. It is too soon to 
speculate about its possible impact on the quality of 
benefit-related decisionmaking at all levels within 
DVA. Other recent legislation as well and court 
intervention may result in substantial changes in DVA 
review and appeal practices. 156 


WHAT ARE THE SIGNIFICANT 
LESSONS FOR A NEW LONG-TERM 
CARE BENEFIT PROGRAM IN THE 
EXPERIENCE OF EXISTING 
BENEFIT PROGRAMS? 

This section summarizes the report. The summary 
is organized around three basic assumptions about the 
importance of providing due process in benefit pro¬ 
grams. Under each assumption, the report identifies 


152 See Barton F. Stichman, “Overview of the Veterans Judicial Review 
Act,” Administrative Law Review, 41, 3, (Summer 1989): 365-397, for a gen¬ 
eral discussion of the Court of Veterans Appeals. 

183 See Frank S. Bloch, “Federal Disability Law and Practice, 1984,” 
Symposium on Federal Disability Benefit Programs (American Bar Association, 
1984) 159. 

154 See Frank S. Bloch, “Federal Disability Law,” 159, Sec. 6.1. 

185 Michael Wildhaber, conversation with author; John A. Sommer Jr. and 
Philip R. Wilkerson, conversation with author. 

186 See Michael E. Wildhaber, et. al.. Veterans Benefits. Representing Vet¬ 
erans Under the New Veterans Judicial Review Act, section on administra¬ 
tive review provisions, 9-17, 1989. 


the relevant lessons learned from the experience of ex¬ 
isting benefit programs, and discusses their implica¬ 
tions for a long-term care program. 

ASSUMPTION: A benefit program’s review and 
appeal procedures cannot provide adequate due proc¬ 
ess unless policies about the programs themselves sup¬ 
port fair decisionmaking. 

Lesson: The Type of Benefit, Sources of 
Financing and Structure of 
Administration of Benefit Programs 

1. The type of benefit provided (periodic payments 
or payments tied to services performed), the urgency 
to beneficiaries of eligibility or coverage determina¬ 
tions, and the type of evidence available to the claims 
decisionmaker (e.g. technical, anecdotal or state of 
mind evidence) all affect the way in which a benefit 
program constructs its review and appeal procedures. 

When benefit program administrators have ade¬ 
quate time and information available for considered 
decisionmaking, an opportunity exists to ensure fair 
initial coverage and eligibility determinations. For 
various reasons such as the priority of cost contain¬ 
ment or the complexity of administration, benefit 
programs do not always take advantage of this oppor¬ 
tunity. Benefit programs that constantly deal with 
acute care needs have difficulty making initial eligi¬ 
bility determinations both rapidly and fairly. 

Historically, benefit programs paying periodic bene¬ 
fits over a long term (DI, SSI, DVA) have developed 
review and appeal procedures that are reasonably ac¬ 
cessible to beneficiaries. The procedures of programs 
that pay benefits based on specific services either to 
providers or beneficiaries (Medicare) have been less 
accessible, possibly because the high volume of claims 
coupled with the relatively low amount of payment to 
each beneficiary makes such procedures appear to be 
unjustifiably costly. 

2. The sources of financing and structure of admin¬ 
istration of benefit programs have an impact on the 
development of review and appeal procedures. In ad¬ 
dition to meeting certain constitutional standards, pro¬ 
grams that are both financed and administered by the 
federal government are subject to federal legislation 
in establishing review and appeal procedures. State fi¬ 
nanced or administered programs develop procedures 
under state law. Privately financed programs do not 
have due process obligations. Federally financed pro¬ 
grams administered by private organizations may have 


204 



differing due process requirements depending on the 
legal relationship between the private organization 
and the federal program. 

Implications for a New Long-Term Care Program— 

Policymakers developing a long-term care program 
are sensitive to the different legal and political reali¬ 
ties of alternative program models. Similar awareness 
that review and appeal procedures are integrally re¬ 
lated to program policies and practices is critical to 
developing procedures that can be effectively im¬ 
plemented. If a long-term care program is placed 
under the administration of an existing benefit pro¬ 
gram, this program’s review and appeal procedures 
are likely to be applied to the new program. If the ex¬ 
isting program’s procedures are problematic, the long¬ 
term care program’s procedures also are likely to be 
problematic. 

Policy decisions about the manner in which benefit 
programs are financed, administered or operated on a 
day-to-day basis are closely related to the review and 
appeal procedures for these programs. Consequently, 
if these procedures are to be fair, certain types of de¬ 
cisions about the underlying program cannot be for¬ 
mulated without consideration of their implications 
for due process. 

ASSUMPTION: Review and appeal procedures 
that meet constitutional due process standards are es¬ 
sential to fair benefit-related determinations. 

Constitutional due process provides a mechanism 
for fair determination of benefit entitlement. In so 
doing, it provides a mechanism for fair determination 
of nonentitlement. 


Lesson: Cost Containment 

1. When beneficiaries’ claims for benefits have sig¬ 
nificantly outstripped available funding, program 
administrators sometimes have responded by increas¬ 
ing the number of initial claims denials. Assertive indi¬ 
viduals or organizations believing that beneficiaries 
were legally entitled to receive these benefits, have 
protested the benefit denials administratively, in court 
or to Congress. 

2. The implementation of review and appeal proce¬ 
dures that meet statutory and constitutional due 
process standards is expensive. In planning for benefit 
programs and calculating their cost, policymakers 
have not taken sufficient account of the cost of 
review and appeal procedures, even though these are 
required by law. 


Benefit programs, chronically strapped for funds, 
frequently resort to cost-cutting shortcuts in adminis¬ 
tering review and appeal processes. Consequently, 
they may countenance policies and practices that do 
not meet constitutional and statutory standards for 
due process, or that are subject to controversy itself 
expensive to resolve. 

As with protests about benefit denials, protests 
against review and appeal determinations or the pro¬ 
cedures themselves, perceived as unfair or in violation 
of law, have taken the form of increased resort to 
benefit program review and appeal procedures, class 
actions in court, and complaints to Congress. 

3. Some benefit programs contain costs by placing 
the risk of payment for provision of services not 
covered by the program on the providers of these 
services. This may encourage increased provider re¬ 
sponsibility regarding the provision of services to 
beneficiaries. But it sometimes results in denying 
beneficiaries legally allowable benefits and due proc¬ 
ess. Because there is generally no mechanism in bene¬ 
fit programs for verification of coverage, providers 
may inform beneficiaries that certain services will not 
be reimbursed by the benefit program. If benefici¬ 
aries want the service, they will have to pay for it 
themselves. In this way, providers avoid the risk of 
nonreimbursement for services performed. The benefi¬ 
ciary has no recourse to request payment from the 
benefit program because the determination of non¬ 
payment has been made informally and prematurely 
by the provider. 

Implications for a New Long-Term Care Program— 

A new long-term care program will be required to 
implement a review and appeal mechanism that com¬ 
plies with constitutional and statutory standards of 
fairness. The program will face challenges similar to 
existing programs in terms of allocating funds for an 
effective process. 

As with existing benefit programs, if beneficiaries 
or service providers perceive reviews as unfair, they 
are likely to protest by resorting to the courts, Con¬ 
gress, and the review process itself. Such actions may 
be costly to the program both monetarily and in 
terms of loss of credibility with beneficiaries and the 
public. If the long-term care program requires pro¬ 
viders to assume the risk for coverage of non¬ 
reimbursed services to beneficiaries, it may create a 
dilemma for providers and beneficiaries similar to that 
in existing programs. Although there may be sound 
fiscal reasons for this policy, policymakers need to 
be aware that it could be perceived as unfair by 
providers and beneficiaries seeking fair claims 
determinations. 


205 


One approach to mitigating tension between pro¬ 
viders and beneficiaries would be, whenever feasible, 
for a long-term care program to establish procedures 
for determining program coverage of specific services 
prior to providing them. 

Policymakers need to understand the potential 
impact of risk placement decisions on long-term care 
beneficiaries who are dependent on providers for the 
basics of life over an extended time period. They 
should carefully consider what sort of of risks on pro¬ 
viders are likely to create inherent distrust of them 
among beneficiaries. 

ASSUMPTION: Benefit programs have an obliga¬ 
tion to insure that the critical components of due 
process function effectively. 

Although the requirements of due process in review 
and appeal procedures are interpreted differently 
among the various benefit programs, there are certain 
basic components that the courts have identified as 
critical to fair determinations. While these procedures 
often function effectively, some policies or practices 
may either be unfair or create the perception of un¬ 
fairness among beneficiaries or the general public. 


Lesson: Representation by 
Lawyers or Lay Advocates 

1. Although the nonadversarial nature of benefit 
program review and appeal procedures is generally 
acknowledged as appropriate, a right to representa¬ 
tion at some stage in the process is considered an 
essential element of fairness. Benefit programs ac¬ 
knowledge that representation significantly increases 
the likelihood of their paying disputed claims. 

Despite the availability of several sources of attor¬ 
ney compensation, a significant number of benefici¬ 
aries do not have, and cannot get, legal representation 
at appellate level hearings. In addition, very few 
beneficiaries have any type of representation during 
the early stages of the review process. This may be 
because beneficiaries are not adequately informed 
about its usefulness, it is unavailable, or programs do 
not encourage its use. 

2. Many beneficiaries making claims against benefit 
programs are vulnerable and inarticulate. Because the 
pool of attorneys is limited, administrators and advo¬ 
cates have suggested using lay representatives in the 
review and appeal process. Adequate training and su¬ 
pervision of lay representatives, as well as assurances 
of their independence from benefit program control, 


are considered prerequisites to their augmenting tradi¬ 
tional legal representation of beneficiaries. 

Implications for a New Long-Term Care Program— 
A long-term care program inevitably will increase the 
number of claims subject to review and appeal, and 
further tax the limited resources available for repre¬ 
sentation of beneficiaries. Many of the beneficiaries of 
a long-term care program are likely to be particularly 
vulnerable both physically and cognitively, so that 
this program may need to provide substantial re¬ 
sources for representation if its procedures are to be 
perceived as fair. Policymakers need to consider the 
extent to which the program will provide assistance 
for payment of either lay representatives or attorneys, 
the stage at which representation is to be authorized, 
and the form it will take. The establishment of a new 
program of lay representation might provide the im¬ 
petus to explore effective alternatives to attorney rep¬ 
resentation for all benefit programs. 

Lesson: Adequate Notice and 
Timely Review 

1. Adequate notice, i.e. notice that clearly states the 
reasons for denial of a claim and beneficiaries’ rights 
to review and appeal, has been extremely difficult for 
benefit programs to formulate. Timely review of 
claims, particularly important for low-income, frail or 
disabled individuals who rely on benefit payments for 
the basics of life, also has eluded benefit programs. 
Although there are reasonable explanations for these 
failures, including complexity of notice requirements 
and inadequate staff to handle the claims caseloads ex¬ 
peditiously, the adverse impact on beneficiaries often 
jeopardizes due process. 

One reason for the lack of clarity of notices is the 
use of bureaucratic, legal or other technical language 
to communicate with beneficiaries, many of whom 
have only an eighth grade education. Another is that 
the use of computer-generated notices frequently pro¬ 
duces stilted language. Inconsistency in the language 
or content of notices also has been identified as a 
problem. This has occurred in programs delegating 
review and appeal functions to several contractors 
without undertaking to establish uniform standards or 
rules of operation. Another problem, insufficiently 
specific reasons for denial of claims, has been identi¬ 
fied by the courts and the General Accounting Office 
as violative of due process requirements. 

2. The slowness of the review and appeal process in 
benefit programs can have dire consequences for 
beneficiaries. Slowness of adjudication has been criti- 


206 


cized by Congress, the courts and GAO. Frequently, 
attempts to speed up initial determination or reconsid¬ 
eration by actions such as instituting claims processing 
quotas have resulted in increased claims denials, many 
of which are reversed at later appellate stages. 

Because of the time and effort involved in pursuing 
review and appeal rights, less assertive beneficiaries 
may be accepting denials of benefits to which they 
are entitled. While this outcome may result in savings 
to the benefit programs, it is inconsistent with achiev¬ 
ing fair determinations of benefit eligibility. 

Implications for a New Long-Term Care Program— 

A long-term care program will be faced with the 
same dilemmas regarding notice and timely review 
that plague existing programs. The due process 
problems can be reduced in this program if, from the 
beginning, the program assumes responsibility for de¬ 
veloping and implementing a system of uniform 
notices. The clarity and appropriateness of notice lan¬ 
guage is likely to evolve over time, but bureaucratic 
sensitivity to notice-related issues could reduce litiga¬ 
tion and complaints to Congress. The long-term care 
program can substantially lower the time involved in 
the review and appeal process by insuring, from the 
beginning, that adequate staff resources are devoted 
to these functions, and that personnel are trained to 
provide expeditious, fair reviews, based on a complete 
record. 

Lesson: Access to Information 
Critical to Determinations 

Due process requires that beneficiaries have access 
to information on which decisions are based. Further¬ 
more, the Administrative Procedure Act requires that 
benefit programs publish final rules in the Federal 
Register prior to implementation, and provide the 
public an the opportunity to comment on the rules 
before publication. Benefit programs, however, com¬ 
municate most of their policies and orders regarding 
review and appeal procedures through limited circula¬ 
tion manuals, directives to specific organizational 
units, or informal contacts. This restricts beneficiary 
access to information that forms the basis for denial 
determinations, making it difficult to argue effectively. 
Benefit programs may avoid statutory requirements 
because the time consumed and expense incurred 
makes compliance unrealistic. Their policies generally 
must respond to rapidly changing technological and 
economic circumstances. In addition, these programs 
are required to make a high volume of review and 
appeal determinations quickly. 


But the experience of benefit programs indicates 
that, in avoiding these requirements, programs have 
become lax in their obligations to inform and involve 
the public and interested parties in articulating pro¬ 
gram policy. Following from this, programs have 
become insufficiently accountable to beneficiaries and 
providers for consistent and open decisionmaking on 
claims. As a result, benefit programs are perceived as 
developing policies and practices that foster denials. 
Courts, Congress, special commissions and the GAO 
have found some of these to be patent violations of 
due process. 

Implications for a New Long-Term Care Program— 

A long-term care program has the opportunity to es¬ 
tablish its own policies on informing the public and 
beneficiaries about policies or practices that affect 
payment of claims. An information policy that insures 
accessibility of relevant internal decisions and direc¬ 
tives, either by encouraging publication or developing 
alternative mechanisms for information sharing, pro¬ 
motes fairness in the review and appeal process. As 
with existing programs, withholding information from 
those who might be adversely affected by it could 
result in litigation, protests to Congress, or the estab¬ 
lishment of investigatory committees. A long-term 
care program needs to balance cost savings derived 
from systematically withholding information against 
the increased monetary and good-will costs of various 
types of protest. 

Lesson: Determination Based on an 
Adequate Record 

Adequacy of the record on which claims review 
and appeal determinations are made is related to infor¬ 
mation accessibility. In order to insure fair decisions, 
benefit programs need procedures for development of 
adequate information about beneficiaries’ medical con¬ 
ditions, ability to function, or any other relevant mat¬ 
ters. Adequate development of claims records is often 
complicated by difficulty in obtaining critical informa¬ 
tion or by the nature of a particular beneficiary’s 
circumstances. 

Benefit programs have been criticized for failure to 
implement policies or practices that encourage staff, 
particularly at the early stages of the review process, 
to develop accurate and complete claims information, 
including ordering medical examinations when appro¬ 
priate. This failure may follow from a decentralized 
or poorly monitored review process, delegation of 
record development to private contractors without 
adequate supervision by the program, or allocation of 
inadequate resources to this function. 


207 



The results have been creation of delays in the 
review and appeal process and frustration of appellate 
level adjudicators attempting to rely on records de¬ 
veloped at an earlier stage as the basis for fair deci¬ 
sions. The most serious consequence for due process 
is that federal programs systematically countenance 
claims denials based on inadequate or inaccurate 
information. 

Implications for a New Long-Term Care Program— 

Compilation and evaluation of information may be 
particularly difficult in a long-term care program be¬ 
cause of the progressive deterioration in the condition 
of many beneficiaries and the frequent reassessment of 
their needs. Another difficulty may arise if the most 
regular observers of a beneficiary’s condition are 
family caregivers or others who are not formal par¬ 
ticipants in the claims determination process. 

As in existing programs, a new program will be re¬ 
quired by law to base benefit-related determinations 
on accurate and complete claims records. Unfortu¬ 
nately, there are few viable models for effective 
enforcement of this obligation. Even though the re¬ 
quirement to develop an adequate record is difficult 
to monitor, long-term care program planners might 
consider developing mechanisms for this in order to 
avoid the cost consequences of unnecessary delays in 
the review and appeal of claims. 

Ways in which a long-term care program can im¬ 
prove its capacity to develop accurate and complete 
claims records include: provision of adequate, well- 
trained staff at each level of the process, motivated to 
make fair decisions; and participation of beneficiaries 
and their representatives in the information collection 
process. 

In addition, a long-term care program might con¬ 
sider developing standards and guidelines for acquir¬ 
ing and evaluating critical information. It could 
monitor record development activities and hold pro¬ 
gram administrators accountable for meeting program 
standards. 

Lesson: Verbal Statements in 
Front of Decisionmaker 

1. Experience of benefit programs indicates that 
beneficiaries receiving face-to-face reviews of some 
sort by decisionmakers are significantly more likely to 
prevail than those who receive only on-the-record de¬ 
terminations. But most benefit programs discourage 
face-to-face reviews until a late stage of the review 
and appeal process. 


Face-to-face reviews by decisionmakers, while 
more time consuming and expensive than on-the- 
record reviews, generally are considered to increase 
beneficiaries perceptions of fairness in conduct of re¬ 
views or appeals. This may be so even if the reviews 
result in denial of benefits. To the extent that early 
opportunities for face-to-face reviews increase benefi¬ 
ciary satisfaction with the determination process, they 
could save benefit programs money and time spent on 
prolonged appeals. GAO and expert commissions 
have recommended that benefit programs institute 
more early face-to-face reviews by decisionmakers. 

2. As the volume of hearings has increased, benefit 
programs, seeking to increase the efficiency and 
reduce the cost of the review and appeal process, 
have considered conducting hearings by telephone. 
Some programs continue to offer this alternative to 
beneficiaries. In general, experiments with telephone 
hearings in benefit programs have not been an un¬ 
qualified success. Despite certain perceived advan¬ 
tages to frail populations in not having to travel to 
hearing sites, many knowledgeable individuals con¬ 
sider that telephone hearings increase the inherent im¬ 
balance of power between decisionmakers and 
beneficiaries. 

Implications for a New Long-Term Care Program— 

Face-to-face review by a decisionmaker at some stage 
in the review and appeal process is established prac¬ 
tice in benefit programs. It may be particularly criti¬ 
cal in a long-term care program where initial claims 
decisions are made by case managers. In order to de¬ 
velop or monitor effective care plans, case managers 
are likely to encourage participation of the benefici¬ 
aries and their caretakers. Beneficiaries, accustomed 
to involvement with decisionmaking in the long-term 
care program, will expect to have direct access to 
decisionmakers reviewing their claims. Because needs 
reassessments may be frequent and changes in the 
services provided may be subtle, the ability of 
reviewers to evaluate beneficiaries’ status first hand 
may be even more important to fair determinations 
than in existing benefit programs. 

Although telephone hearings should be considered 
for those beneficiaries who want them, a long-term 
care program should not rely on them. Their draw¬ 
back, particularly for elderly persons who may have 
hearing loss or are confused, or for mentally ill indi¬ 
viduals, is evident. 


208 


Lesson: Hearings Prior to 
Denial or Termination of Benefit 

The issue of whether benefit programs, providers 
or beneficiaries should pay the costs of care or of 
pension payments during the pendency of claims re¬ 
views or appeals has economic and administrative im¬ 
plications for all parties. Because frail, low-income 
beneficiaries, in particular, may rely on payments 
from benefit programs as their lifeline, due process 
concepts afford them some protection, although its 
extent is unclear. Particularly when termination of on¬ 
going benefits or services, or denial of critically 
needed medical care are at stake, beneficiaries may be 
entitled to some sort of review or appeal procedure 
prior to withdrawal of benefits or refusal to pay for 
care. But the need for a speedy determination may 
take precedence over considerations of beneficiary 
vulnerability. In this situation, due process generally 
requires that the beneficiary have access to a benefit 
program’s established review and appeal process im¬ 
mediately after an adverse determination has been 
made. 

Implications for a New Long-Term Care Program— 

The law regarding who bears the cost of care pend¬ 
ing exhaustion of beneficiary review and appeal rights 
is in flux. Consequently, it is difficult to predict the 
legality of specific policies that a long-term care pro¬ 
gram might develop to address this issue. In develop¬ 
ing review and appeal procedures for a long-term 
care program policymakers need to determine the cir¬ 
cumstances in which benefits will be available pend¬ 
ing a decision to terminate benefits. Beneficiaries of 
this program will be physically or mentally vulnerable 
and may also be poor. The home-and-community- 
based service aspect of the program, by its nature, is 
focused on assisting individuals with substantial de¬ 
pendency to function outside of an institution. Prema¬ 
ture deprivation of support could be devastating. 

Also, the definition of termination in a long-term 
care program is more complex than for most existing 
benefit programs. Once an individual receives benefits 
based on eligibility for assistance with ADLs, changes 
in the care plan are a more likely occurrence than 
total termination. Policymakers need to consider care¬ 
fully which of these changes could not be imple¬ 
mented prior to the beneficiary’s exercise of some 
type of review and appeal rights. 


Lesson: Decisions by an Impartial 
Individual or Panel 

When the review and appeal process is linked 
closely to program administration, policies insuring 
the independence and integrity of program reviews 
and appeals are essential. Benefit programs have de¬ 
veloped a variety of mechanisms intended to separate 
these procedures as much as possible from ongoing 
program influences. In addition, benefit programs gen¬ 
erally provide for some sort of judicial review. Bene¬ 
ficiaries’ representatives, Congress and the courts 
have expressed concern about the ability of de¬ 
cisionmakers to function independently, and about de¬ 
liberate program intrusions into this sphere of activity. 
Three significant considerations in developing inde¬ 
pendent mechanisms are: 

(1) Insuring the ability of high level, expert admin¬ 
istrative adjudicators such as administrative law 
judges to make independent, objective decisions about 
benefit eligibility; 

(2) Understanding that when a benefit program 
designates private contractor organizations as claims 
adjudicators and reviewers, contracts with these orga¬ 
nizations must establish sufficient independence from 
the benefit program to insure fair decisionmaking; and 

(3) Avoiding a review and appeal structure con¬ 
tained entirely within the agency responsible for the 
benefit program, with no recourse for beneficiaries to 
the judicial system. 

Implications for a New Long-Term Care Program— 

The initial assessment of eligibility for a long-term 
care program and the development of beneficiaries’ 
care plans are likely to be performed by organizations 
or individuals employed by, or contracting with, the 
long-term care program. These decisionmakers may 
be expected to interpret policies and directives relat¬ 
ing to claims determinations from the perspective of 
the program, or to follow program cost containment 
guidelines. Because of this inherent potential for con¬ 
flict of interest between beneficiaries and initial 
decisionmakers, due process requires that policy¬ 
makers be particularly sensitive to establishing mecha¬ 
nisms that will insure impartial reviews and appeals. 


209 


WHAT MECHANISMS MIGHT BE 
DEVELOPED TO PROVIDE 
ADVOCACY SERVICES ON BEHALF OF 
BENEFICIARIES IN THE 
BENEFIT PROGRAM REVIEW AND 
APPEAL PROCESS, OR TO INCREASE 
THE ABILITY OF BENEFICIARIES TO 
ADVOCATE FOR THEMSELVES? 

One crucial element of due process, beneficiary rep¬ 
resentation, is most appropriately provided by organi¬ 
zations or funding sources outside the authority of the 
benefit program. Effective representation and educa¬ 
tion of beneficiaries about their rights can serve as 
checks on failure to provide for the other legally 
mandated elements of administrative due process. 

The caseloads of existing benefit programs are not 
being served adequately by attorneys or lay advo¬ 
cates. A major reason for this is that most benefici¬ 
aries cannot afford to pay private attorneys the actual 
cost of their services. The community of attorneys 
willing to undertake pro bono representation of benefi¬ 
ciaries cannot begin to meet the need for their serv¬ 
ices. The pool of committed and trained volunteer lay 
representatives assisting in certain programs and geo¬ 
graphic areas cannot fill the gap either. Today, few 
programs rely on paid and trained lay individuals to 
represent benefit program beneficiaries. With the en¬ 
actment of a long-term care benefit program the al¬ 
ready overwhelming population of unrepresented 
beneficiaries will increase significantly. What policies 
and programs should Congress and national organiza¬ 
tions concerned about beneficiary representation 
pursue in order to institutionalize effective benefit 
program advocacy services on a national basis? 

Funding Sources for Existing 
Advocacy Programs 

The federal government provides several sources of 
funding for advocacy on behalf of low-income indi¬ 
viduals regarding benefit claims. Some programs re¬ 
ceive funding from more than one of these sources. 

The Legal Services Corporation Act authorizes 
funds for offices that provide legal services to low 
income individuals at the local level. These offices 
may represent elderly or disabled clients in their 
claims against benefit programs. 157 


157 42 U.S.C., Sec. 2996, et seq. 


The Older Americans Act requires that funds 
granted to the states and distributed to Area Agencies 
on Aging be used to provide legal assistance to the 
elderly. 158 This is defined as “legal advice and repre¬ 
sentation by an attorney (including, to the extent fea¬ 
sible, counseling or other appropriate assistance by a 
paralegal or law student under the supervision of an 
attorney), and includes counseling or representation 
by a nonlawyer where permitted by law, to older in¬ 
dividuals with economic or social needs.” 159 This 
statute also requires states to fund an extensive net¬ 
work of ombudsmen to represent nursing home resi¬ 
dents in disputes with nursing homes, and authorizes 
states to extend this service to residents of board and 
care homes or recipients of home health care. 160 In 
addition, this Act provides limited resources to states 
to demonstrate and evaluate the effectiveness of 
consumer protection projects intended to protect 
older individuals receiving services in the home that 
are furnished or assisted with public funds. State or 
local ombudsmen and legal assistance agencies may be 
supported under this program. 161 

The Equal Access to Justice Act 162 authorizes 
compensation for attorneys successfully representing 
clients in cases against federal agencies in federal 
court. Certain actions against benefit programs are in¬ 
cluded. Individual practitioners and legal services at¬ 
torneys may apply for compensation under this act. 
The Developmental Disabilities Assistance and Bill of 
Rights Act 163 provides payment to state-designated 
agencies to provide protective services for develop- 
mentally disabled children and adults, and to repre¬ 
sent them before administrative agencies or courts. 

The Protection and Advocacy for Mentally Ill In¬ 
dividuals Act, 164 provides payment for services simi¬ 
lar to those for the developmentally disabled, only to 
agencies already receiving funds under that legisla¬ 
tion. In addition to federal funding, advocacy and 
consumer education programs may receive financing 
from various state sources (e.g. agencies focused on 
aging or disabled populations, health departments or 
attorneys general offices), and from private organiza¬ 
tions such as the American Association of Retired 
Persons or the National Council of Senior Citizens. 
Direct compensation by clients, with or without a 
benefit program’s agreement to withhold payment 
from benefits owed, offers another source of private 
payment for client representation. 


158 42 U.S.C. Sec. 3007(a)(15). 

159 42 U.S.C., Sec. 3022. 

160 42 U.S.C., Sec. 3007(12). 

161 42 U.S.C., Sec. 4028. 

162 28 U.S.C., Sec. 2417 (b), (d). 

163 42 U.S.C., Sec. 6001, et seq. 

164 P.L. 99-319. 


210 




Existing Advocacy Programs 

A variety of advocacy programs, some using attor¬ 
neys, others lay individuals or a combination of legal 
and lay staff, actively provide some type of advocacy 
to beneficiaries. These programs may receive federal 
and/or state or private funding. Some rely heavily on 
volunteers, others on paid staff. Categories of services 
these programs provide include: 

• legal services (general or specializing in a type of 
claim) 

• hot lines 

• ombudsman 

• developmentally and mentally disabled protective 
services 

• benefit counseling services 

• pro bono legal representation 

• professional lay representation 

• consumer education 

Some programs combine several categories of 
service. Without evaluating either the programs or 
the services that they provide, it is useful to include 
examples of existing programs with some experience 
in advocating for or providing consumer education to 
the beneficiary community. 

Legal Services—Legal services organizations pro¬ 
vide legal advice and representation for low income 
clients either on a sliding fee scale basis or for free. 
They also may mount class action suits which can be 
effective in attacking the policies and practices of ben¬ 
efit programs. 

Typically, clients walk into or telephone a legal 
services program to ask for assistance without having 
had prior contact. Ethnically based organizations, 
unions and others may also sponsor legal services pro¬ 
grams for their members. In addition, some legal serv¬ 
ices programs concentrate on a particular category of 
client. The National Senior Citizens Law Center, for 
example, represents the elderly in a variety of matters 
involving benefit programs. National Veterans Legal 
Services provides similar assistance to veterans. 

In recent years, a number legal services programs 
have been established to represent Medicare benefici¬ 
aries seeking payment of claims under the various 
Medicare programs. One program in Connecticut, 
Legal Assistance to Medicare Patients (LAMP) 
claims a 95 percent success rate, for 700 clients 
served, in obtaining benefit awards for clients. 165 


165 Legal Assistance to Medicare Patients, Willimantic, Ct., Your Right 
to Medicare Benefits for Home Health Care, May 1989. (pamphlet) 


Similar programs, for example, Massachusetts Medi¬ 
care Advocacy Project and Medicare Advocacy 
Project of Los Angeles, assist beneficiaries with a 
range of concerns in relation to Medicare. 

Hot Lines—Legal hot lines are being established for 
beneficiaries to call in order to receive information 
and advice about claims-related problems. Their struc¬ 
ture and bureaucratic relationships may be critical to 
successful operation. The Legal Council for the El¬ 
derly (LCE), an affiliate of the American Association 
of Retired Persons, established a Hotline pilot project 
in Pittsburgh, PA in 1985 that provides free legal 
advice by telephone to all older residents of the area. 
There are now four LCE Hotlines in the United 
States. Attorneys receiving hotline calls may provide 
only brief services, but may make referrals to social 
or legal services programs or private attorneys. 166 

Ombudsman—The ombudsman, as developed under 
the Older Americans Act, is a trained volunteer, su¬ 
pervised by an attorney, who advocates on behalf of 
nursing home residents regarding quality assurance 
issues. Residents may complain, for example, that the 
nursing home is providing inadequate service or abus¬ 
ing and harassing the residents. 

Although recent legislation authorizes extension of 
this activity to board and care homes or home care, 
most states have not done so. In part, this is because 
there has been no increase in funds accompanying this 
authorization. Also, the protection of clients from 
poor quality service in the community setting requires 
a different model of practice than nursing home advo¬ 
cacy. The ombudsman would have to be trained dif¬ 
ferently in order to handle a large volume of small 
concerns that require immediate attention. 

The extension of the ombudsman concept to more 
generalized advocacy on behalf of beneficiaries of a 
long-term care benefit program would, according to 
some, stretch the resources of ombudsman programs 
substantially, and require staff to deliver services dif¬ 
ferent in critical ways from those contemplated by the 
Older Americans Act. Existing ombudsman programs 
deal with local level service providers, using volun¬ 
teers to perform specific tasks. Representation of 
beneficiaries, or even assistance with filing claims and 
requests for review, would require a completely 
different orientation, intensive training and intensive 
supervision. 167 


188 Elder Law Forum, Legal Counsel for the Elderly, 1, (5) (September/ 
October 1989). 

187 Ann Lordeman, National Association of State Units on Aging, conver¬ 
sation with author (Washington, D.C.: November 15, 1989). 


211 


28-861 - 90 - 8 : QL 3 




Another issue in expanding the ombudsman pro¬ 
gram to serve long-term care beneficiaries is lines of 
authority. Currently, the ombudsman program is 
either located within an Area Agency on Aging or is 
a contractor to the agency. These agencies may 
become responsible for administration and case man¬ 
agement in a long-term care program. An effective 
long-term care ombudsman program would have to 
function independently of the organization—most 
likely a public agency or its contractor—that develops 
and manages the care plans for beneficiaries. 

Developmentally and Mentally Disabled Protective 
Services—Under federal law, states are required to es¬ 
tablish units that provide protective services for the 
developmentally and mentally disabled, and to pro¬ 
vide advocacy on their behalf, including asserting 
their entitlements to various federal benefits. The 
Maryland Developmentally Disabled Center is 
an example. 

This center operates an advocacy and protective 
services program at three locations in the state. It uses 
trained lay advocates supervised by attorneys to 
handle 3,000 cases a year on a range of issues. Be¬ 
cause the center is responsible for the developmen¬ 
tally disabled, it receives funds to provide similar 
services for the institutionalized mentally ill. The staff 
handles its own caseload including interviewing cli¬ 
ents, filling out applications and other forms for SSI, 
and representing beneficiaries through the ALJ level 
in SSI cases. Center attorneys represent beneficiaries 
in court and implement proactive strategies to gain 
enforcement of rights. The Center provides technical 
assistance and training to its satellite offices. 

Benefit Counseling Services—Particularly in the 
area of medical benefits, programs, staffed largely by 
volunteers, provide extensive counseling and related 
services to beneficiaries. The predominant program is 
the American Association of Retired Persons’ 
(AARP) Medicare and Medicaid Assistance Program 
(MMAP), established 10 years ago, and currently 
serving 60,000 clients in 35 states. About 3,400 lay 
volunteers counsel beneficiaries as to their options and 
entitlements, and assist in understanding benefit pro¬ 
gram procedures, filling out forms, and finding experi¬ 
enced advocates. A unique feature of the program is 
that volunteers are available to meet with clients in 
their homes. AARP’s participation in MMAP includes 
establishing contact with local nonprofit agencies 
with which MMAP can affiliate. Through these agen¬ 
cies with broad links to the community, clients are re¬ 
ferred to MMAP. 

In addition, AARP provides technical assistance, 
develops and distributes manuals and other material, 


provides regular training of new volunteers, updates 
experienced volunteers on new benefit program devel¬ 
opments, coordinates among MMAP programs and 
supervises the entire project. 

Similar programs are being funded by state govern¬ 
ments in Massachusetts, New Jersey, North Carolina, 
Illinois, Washington, California and Maryland. Mary¬ 
land’s Senior Health Insurance Counseling and Assist¬ 
ance Program (SHICAP) focuses on Medicare and 
Medigap insurance. Staff provides claims assistance, 
and files requests for review and reconsideration on 
behalf of beneficiaries. Legal backup is available for 
its claims assistance work. In addition, the Maryland 
Attorney General, through its Consumer Health Ad¬ 
vocate Office, litigates claims and related cases. 

Pro Bono Representation—Although private attor¬ 
ney representation of indigent clients is established 
practice, it only scratches the surface of the need for 
legal assistance. Several states have programs encour¬ 
aging attorneys to provide pro bono services to the el¬ 
derly. Similar programs may be available for the 
handicapped, mentally ill or developmentally disabled. 
Legal Counsel for the Elderly (LCE) provides train¬ 
ing for attorneys interested in representing benefit 
program beneficiaries without receiving compensa¬ 
tion. The American Bar Association, through its 
Commission on the Legal Problems of the Elderly 
and the Private Bar Involvement Project, publishes 
literature and holds conferences to facilitate the par¬ 
ticipation of the private bar in developing special 
projects, called Pro Bono Seniorum, to represent the 
elderly. 

One private program, The Volunteer Lawyers 
Project, established by LCE in 1977, trains members 
of the bar, frequently affiliated with law firms, in all 
areas of elderlaw. LCE then assigns cases to these at¬ 
torneys, providing them with technical assistance and 
maintaining quality control. The attorneys accept no 
fees for their services. In addition, LCE provides 
legal representation directly to low-income elderly 
clients. 

Lay Representation—A long-term care program 
will drastically increase the number of benefit pro¬ 
gram beneficiaries in need of counseling, claims assist¬ 
ance, and representation. A partial response to this 
need is the establishment of a new profession of lay 
benefit specialist. Currently benefit program regula¬ 
tions and, in some states, the law inhibit the develop¬ 
ment of a corps of lay advocates to perform certain 
functions traditionally within the province of the legal 
profession. 


212 


Barriers to Developing a Substantial Corps of Lay Ad¬ 
vocates —In order to facilitate representation by 
nonlawyers before benefit programs, these programs 
must issue clear regulations implementing the author¬ 
ity granted them by the Administrative Procedure 
Act to permit lay representation. Unless the benefit 
programs clarify their status, nonlawyers attempting 
to provide assistance to beneficiaries may fear pros¬ 
ecution under state laws for unauthorized practice of 
law. In addition, some state laws need to be amended 
in order to grant lay advocates the right to provide 
assistance, including some level of representation, 
without fear of reprisals from the state bar. 168 

A Benefit Specialist Program —The Center for Public 
Representation in Madison, Wisconsin has developed 
a statewide network of lay benefit specialists. The 
program was established in 1977 on the premise that 
low income elderly were not receiving their fair share 
of government entitlements because the benefit pro¬ 
grams were too complex and the bureaucracy face¬ 
less. In order to maximize the resources available for 
advocacy, the Center developed mechanisms for 
training lay personnel to be advocates, continually up¬ 
dating them on benefit program developments, and 
providing ongoing attorney supervision. At the point 
when a case requires an attorney’s skill, it is trans¬ 
ferred to legal staff. 

Wisconsin has placed a benefit specialist in the 
office of every County Committee on Aging. The 
Center provides back-up for county offices, direct 
representation and technical assistance. 


168 Zona Fairbanks Hostetler, “Nonlawyer Assistance to Individuals in 
Federal Mass Justice Agencies: The Need for Improved Guidelines," The 
Administrative Law Journal, 2, (1) (1988): 114, et seq. 


Consumer Education—The publication of hand¬ 
books, guidelines and pamphlets describing benefici¬ 
ary entitlements and rights to review and appeal from 
benefit denials is widespread. Benefit programs are 
required to publish this sort of literature. Insurance 
carriers and fiscal intermediaries, providers, consumer 
organizations and others may also provide it. The 
American Association of Retired Persons publishes a 
large volume of information intended to inform older 
consumers about subjects of interest to them, includ¬ 
ing benefit entitlements. National organizations repre¬ 
senting handicapped or developmentally or mentally 
disabled individuals probably provide this service to 
their members also. The quality of publications from 
so many sources is bound to vary, and the effective¬ 
ness of their distribution has not been systematically 
evaluated. 

Consumer education efforts tend to be focused on 
particular topics. The development of materials, even 
within one organization or agency, often is not ade¬ 
quately coordinated, so that there may be a lot of 
information available about some aspects of benefit 
programs and not enough about others. 


Summary 

Advocacy and consumer information will be criti¬ 
cal to assuring that a long-term care program’s claims 
review and appeal procedures comply with due proc¬ 
ess and are available to all beneficiaries with a legiti¬ 
mate need to use them. Fortunately, there are a 
number of innovative programs that might serve as 
models for encouraging beneficiaries of this program 
program to be effective consumers of its services, and, 
when necessary, to assert their rights to the services 
that it provides. 


213 














































































































Staff Memoranda and 
Briefing Papers 




































Canada’s Health Care System: Questions Americans Should Ask * 


It is not hard to understand why the Canadian 
health care system looks attractive to Americans con¬ 
cerned about both large numbers of uninsured citizens 
and high medical costs. The most easily measured at¬ 
tributes of the Canadian system look very appealing: 

• universal coverage, with no financial barriers to 
care (compared to 31-37 million uninsured in the 
U.S.) 

• per capita spending at two-thirds the U.S. level 
(about $1,200 in adjusted U.S. dollars in 1985, 
compared to about $1,800 in the U.S.) 

• slower rates of increase in per capita health care 
costs, measured in constant dollars (3.1 percent 
per year in Canada, 4.8 percent per year in the 
U.S., 1971-1985). 

To draw lessons from the Canadian experience, 
however, it is necessary to look at what is less easily 
measurable in the system—in particular, the factors 
that explain lower spending, the consequences of 
lower spending, and the ways in which spending is 
held in check. 


Why Does Canada Spend Less? 

Canada’s lower health spending per person is not a 
function of fewer doctors (physicians per person are 
about equal in Canada and the U.S.), fewer hospital 
beds (Canada has more than the U.S.), or lower use of 
institutional care (Canadians use more hospital days 
per person than Americans). 

Rather, lower spending reflects lower costs per 
hospital day, lower fees to physicians, and lower 
administrative costs. Lower costs per hospital day 
appear to mean lower “intensity” or resources per 
day of hospital care—partly a reflection of lower use 
of sophisticated technologies, fewer staff, and greater 
use of hospitals by chronic care, rather than acutely 
ill, patients. Lower physician fees reflect the fact that 
in Canada, in contrast to the U.S., government deter¬ 
mines fees and can, in fact, keep fee increases below 
rates of inflation. Administrative cost savings come 

• Briefing paper prepared by Judith Feder for July 27, 1989, working 
meeting. 


from universal eligibility, common benefits, and reli¬ 
ance on a single (government) insurer—eliminating 
marketing expenses, eligibility and benefit determina¬ 
tions, and simplifying revenue collection and payment 
of bills. 


What are the Consequences of Canada’s 
Lower Spending? 

In terms of services provided, the most visible con¬ 
sequence of lower spending in Canada appears to be 
lower availability and use of sophisticated technol¬ 
ogies. Hospitals are paid global budgets and must 
decide how to allocate those budgets among alterna¬ 
tive activities. In addition, they must receive govern¬ 
ment approval to adopt new technologies. The result 
is that specialty services like cardiac surgery or radi¬ 
ation therapy are available in fewer Canadian than 
American hospitals. Furthermore, high occupancy 
rates, partly related to long stays by chronic care pa¬ 
tients, may tie up hospital beds and create service 
delays (e.g., for cardiac or hip replacement surgery). 

What we’d most like to know about lower spending 
is what it means for people’s health. Unfortunately, 
our capacity to provide that answer is decidedly lim¬ 
ited. We measure health status at very gross levels— 
primarily in terms of death rates, at various ages, and 
death rates are affected by numerous other factors be¬ 
sides health care. Canada’s lower spending is not asso¬ 
ciated with lower performance on these measures; in 
fact, Canada has substantially lower infant mortality 
rates than the U.S. 

Such gross measures, however, do not tell us 
whether lower availability and use of technologies or 
delays in surgical procedures, which may occur in the 
Canadian system, have negative consequences for 
health. 


How is Spending Held in Check? 

Because there is only one payer for health care in 
Canada—the government in each province—and be- 


217 



cause the government sets rates, government decisions 
determine what providers get paid. By limiting what 
it will pay, the Canadian system limits the supply of 
health care services. For hospitals, limits come from 
global budgets and approval of capital expenditures. 
For physicians, government limits access to technol¬ 
ogy (provided primarily in hospital settings) and limits 
fees. In Quebec, limits apply to total expenditures (per 
capita incomes, for general practitioners). Attempts to 
incorporate similar caps in other provinces have 
aroused considerable controversy. 

Physicians fees (and expenditure targets in Quebec) 
are set through negotiation between provider associa¬ 
tions and provincial governments. The process is one 
of political conflict, “played out,” as Canadian econo¬ 
mist Robert Evans describes, “as large-scale political 
theater, with all the rhetorical threats and flourishes 
that political clashes require.” Conflicts over gov¬ 
ernment’s right to prohibit physicians from billing 
patients led physicians to strike in Ontario, and physi¬ 
cians have used the courts to challenge provincial re¬ 
strictions on physician location. 

Although costs increase more slowly in Canada 
than in the U.S., Canadians themselves have not been 
satisfied with the growth in their expenditure levels. 
Health expenditure increases have stayed more in line 
with general inflation rates than in the United States, 
but Canada’a care costs have increased at significant 
annual rates. 

Efforts to tighten cost control have taken various 
forms. In 1977, the federal-provincial financing for¬ 
mula was changed. Instead of splitting costs 50-50, 
whatever their level, the new law fixed the annual 
rate of increase to parallel the rate of growth in the 
GNP. As a result, the provincial share of costs has in¬ 
creased—in Quebec, reportedly, to 61 percent. 

At the provincial level, efforts to achieve greater 
cost control have focused on utilization of physician 


services. Constraints on fees were accompanied in 
Canada by an increase in the volume of services phy¬ 
sicians provided, thereby undermining government’s 
capacity to control costs. Outside Quebec, that pat¬ 
tern has persisted over time. 

Quebec responded by refining its fee schedule and 
by capping GP incomes and total expenditures on 
specialists’ services: if expenditure increases exceed 
predetermined levels, subsequent fee increases 
are reduced. 

Although other provinces may ultimately follow 
Quebec’s lead, they have been less aggressive in con¬ 
trolling total expenditures and less successful in con¬ 
taining costs. Some Canadian provinces have begun to 
look beyond fee limits to controls on physician supply 
as a means to limit spending. 

Even proponents of the Canadian system do not 
argue that cost containment is easy or without con¬ 
flict. Rather, they argue that conflict can be managed 
and that policy refinement and political will can keep 
spending in bounds. 


What are the Lessons From the Canadian 
Experience? 

• Universal coverage (indeed, care that is free to 
consumers) can be compatible with lower rates of 
spending increase than the U.S. now incurs. 

• Slower expenditure growth depends on policy 
tools and political willingness to limit amounts paid to 
providers. 

• Slower spending growth does not guarantee 
greater efficiency or necessarily threaten quality 
or access. Consequences should be measured, not 
assumed. 


218 


Financing Long-Term Care in Canada * 


Introduction 

Despite similarities between Canada and the United 
States in their geography, demographics and cultural 
heritage, Canada has chosen a different approach to 
conceptualizing the role of government in financing 
and delivering long-term care. However, it is impor¬ 
tant to state upfront that there is no one Canadian 
long-term care system. Each of the 10 provinces is re¬ 
sponsible for administering its own long-term care 
programs. There is, therefore, wide variation in the 
availability of and access to services, particularly 
home and community-based care. Given this impor¬ 
tant caveat, the Canadian long-term care experience 
may provide some guidance for reform of long-term 
care policy in the United States. 


Federal Support for Long-Term Care 

The financing of long-term care is best understood 
within the context of Canada’s universal health in¬ 
surance system which has been in place for hos¬ 
pitals since 1958 and for medical care since 1968. As a 
response to provincial complaints that the health in¬ 
surance program created incentives for high-cost hos¬ 
pital-based care, the 1977 Established Programs 
Financing Act provided to each province a per capita 
extended care block grant. The amount (set at 20 Can 
$ per capita in 1977, and at 49.15 Can $ in 1988-99) 
has an automatic escalator for inflation. The purpose 
of the grant was to permit provinces the flexibility to 
introduce less expensive and perhaps more desirable 
forms of care than hospital care, such as nursing 
home care, community-based care, and home care. In 
contrast to the health insurance program, no stipula¬ 
tions for comprehensiveness and universality were at¬ 
tached to the extended care grants. 

The Canadian federal government provides addi¬ 
tional subsidies (matched 50-50 with the provinces) 
for care to the poor. 

* Briefing paper prepared by Robyn I. Stone for July 27, 1989, working 
meeting. 


Institutional Care 

With the assistance of the annual federal block 
grant, all but three of the Eastern-seaboard maritime 
provinces provide universal entitlement to nursing 
home care. Eligibility is based on functional disability. 
No income or assets tests are applied, although the 
consumers do pay part of the bill. All nursing home 
residents are charged a monthly co-payment for room 
and board which equals the maxi m um federal 
monthly income security benefit less a comfort allow¬ 
ance (about $90 per month in 1984). This copayment 
is indexed to rise with the cost of living and publicly 
financed pensions. 

The three provinces without universal nursing 
home coverage contribute to the financing of nursing 
home care through a residual program for people 
who have “spent down” to poverty (similar to Medi¬ 
caid reimbursement for institutional care in the United 
States). 


Home and Community-Based Care 

There is much variation among the provinces 
in the provision of home and community-based care. 
Manitoba, which has a province-wide, universal, no- 
cost-to-consumer home and community-based care 
program, has the oldest and most fully-developed 
system in Canada. This program, administered by the 
Office of Continuing Care, has a single point of entry 
for both institutional and community-based and home 
care. A standardized assessment tool is used to deter¬ 
mine eligibility. Both level of functional disability (re¬ 
gardless of age) and availability of informal supports 
are considered in determining the services govern¬ 
ment will provide. Although the need for institutional 
care is recognized, the goal of the Manitoba long¬ 
term care program is to keep disabled persons in the 
community as long as possible by providing a range 
of personal care and other nonmedical services. 

British Columbia’s long-term care program is pat¬ 
terned after the Manitoba model. The program serves 


219 



all adult residents, although children do receive home 
nursing care. Homemaker services and handyman 
services (the primary home care services offered by 
British Columbia’s Long-Term Care Program) are not 
free; a sliding scale based on income is used. Never¬ 
theless, no one is impoverished in order to be eligible 
for services. Case managers are responsible for assess¬ 
ing and authorizing levels of care in facilities as well 
as in the community. 

In contrast, much of the publicly financed home 
care in Ontario, the most populous province, is medi¬ 
cally oriented (analogous to the home health benefit 
under Medicare in the United States). Chronic home 
care services (e.g., personal care, homemaker chore) 
are available through the Ministry of Community 
and Social Services, but they are means-tested and 
targeted to the poor. There is no consistent case 
management. 

At the opposite end of the spectrum are the rel¬ 
atively poor maritime provinces. They are piecing 
together home care programs based on existing re¬ 
sources, with Nova Scotia in the lead by developing a 
coordinated single-entry system through its home¬ 
maker agencies. Nova Scotia and New Brunswick are, 
in fact, attempting to develop their home care pro¬ 
grams before instituting universal nursing home cov¬ 
erage. Therefore, it will be interesting to see whether 
subsidized home care will make nursing home care 
(which requires “spend-down”) less attractive to dis¬ 
abled persons and their families. 


Strengths and Weaknesses of Canada’s 
Program 

• Strengths—All Canadians, with the exception of 
residents of three maritime provinces, are entitled 


to nursing home care. Although there is a stand¬ 
ard co-payment for room and board, no one is 
pauperized in order to have access to institutional 
long-term care. 

• In some provinces, publicly financed, non- 
medically-oriented home and community-based 
care is available free of charge (e.g., Manitoba) 
or on a sliding scale basis (e.g., British Columbia). 
These programs tend to have a single point of 
entry and a case management system which de¬ 
termines eligibility and service packages based on 
functional need and the availability of informal 
care supports. 

• There appears to be no runaway utilization of 
home and community-based care programs in 
provinces that fund these services because of case 
management and the commitment to operate 
within available funds. 

• Weaknesses—Home and community-based long¬ 
term care services are not available in all prov¬ 
inces. Even among provinces that finance care, 
there are differences in the types and amount of 
services provided. Access to community-based 
and home care, therefore, is inequitable across 
provinces. 

• Many provinces attempt to control nursing home 
costs by limiting bed supply. Expenditure control 
that relies on constraining bed supply does not, 
however, guarantee efficient use of services. Use 
of hospitals for long-term care patients is sugges¬ 
tive of this inefficiency. 

• Just as in the United States, Canada does not ef¬ 
fectively coordinate health care services with 
nonmedical long-term care services. Further¬ 
more, even though several provinces have devel¬ 
oped home and community-based care programs, 
because Canada’s health insurance program 
covers medically-oriented care in institutions or 
at home, these services receive greater emphasis. 


220 


Comparing Health Care Financing Across Nations: A Summary * 


Coverage 

• Outside of the United States, government assur¬ 
ance of universal health care coverage is the 
norm in industrialized nations. 

• Universal coverage does not imply a centralized, 
government-run system. Rather it is achieved 
through a variety of mechanisms, ranging from 
totally publicly financed and owned systems (as 
in the United Kingdom) to systems with multiple 
insurance funds (as in Germany and France). 


Financing 

• Public spending as a share of total health spend¬ 
ing averaged close to 80 percent for industrialized na¬ 
tions in 1986; in the United States, the proportion was 
41 percent. 

• Most countries employ a variety of public financ¬ 
ing sources with some relying more heavily on gen¬ 
eral taxes, others on payroll taxes, and some on 
employee and/or employer premiums. 

• All nations experienced substantial growth in 
health spending as a share of total output between 
1960 and 1975, increasing, on average, from 4.0 per¬ 
cent of GNP to 6.0 percent. 

• Between 1975 and 1985, growth in health spend¬ 
ing as a share of output slowed substantially (6.9 per¬ 
cent of GNP to 7.3 percent, on average). 

• Compared to other countries, the U.S.: 

—devotes the largest share of production output to 
health (11.1 percent in the U.S.; 7.2 percent on 
average for OECD nations, 1986) 

—derives the smallest share of spending from 
public sources (41 percent in the U.S.; 77 percent 
for all OECD nations, in 1986) 


• Paper prepared by Judith Feder for July 27. 1989, working meeting. 


—spends the most on health care, per person 
($1,926 in the U.S.; $958, on average, for all 
OECD nations, in 1986). 


Controlling Costs 

• Like the U.S., most industrialized nations today 
have come to question the resources they are devot¬ 
ing to health care and want to spend less. 

• Unlike the U.S., most industrialized nations— 
even those with several insurance funds—had de¬ 
veloped (by the 1980’s) government authority over 
payment rates (and, in some cases, total expenditures) 
to providers. 

• Willingness to use government authority to re¬ 
strict expenditure growth, and the political conflict 
control entails, varies from place to place and over 
time. When willing, however, governments seem able 
to restrict cost growth. 

• Annual increases in health prices above general 
prices are much greater in the U.S. than in other 
countries (3.4 percent in the U.S. versus 0.8 percent 
on average for seven major OECD nations, 1980— 
1986). 

• By contrast, U.S. annual increases in use/inten¬ 
sity of service per person are relatively low (2.0 per¬ 
cent in the U.S. versus 2.5 percent on average for 
seven major OECD nations, 1980-1986). 


Quality and Efficiency 

• Lower expenditures on health care may mean 
less or different health care—particularly, in terms of 
ready access to high technology services. Lower ex¬ 
penditures also mean lower payments (and incomes) 
to providers of care. 

• Expenditure controls have been instituted primar¬ 
ily to limit public expenses. Their consequences for 


221 



quality, access, and efficiency have not been system¬ 
atically evaluated. 

• Higher expenditures on health care do not guar¬ 
antee better health outcomes. While the U.S. ranks 


highest among industrialized nations in spending, it 
ranks near the bottom with respect to infant mortality 
rates and only ranks in the middle with respect to life 
expectancy. 


222 


Comparing Financing and Delivery of Long-Term Care Across Nations: A 

Summary * 


Comparing financing and delivery of long-term 
care across nations is complicated by differences in 
the way care is defined—e.g., what is an institution? 
What is medical vs. social service? It is further com¬ 
plicated by the lack of comprehensive, accurate data, 
particularly for care provided in people’s homes or in 
the community. Keeping these limitations in mind, the 
following observations can be made about long-term 
care in industrialized nations: 


Financing Long-Term Care 

• In long-term care, unlike acute health care, uni¬ 
versal entitlement without regard to income is not the 
norm among industrialized nations. In about half the 
OECD countries, government funding for institutional 
care is provided on a welfare basis rather than on an 
insured entitlement basis. Government-funded home 
care is even more likely to be targeted to the low- 
income population. Where entitlements exist, the ben¬ 
efits are limited. Some examples of these programs 
are: 

• All Canadian provinces have an entitlement pro¬ 
gram for nursing home care; residents are re¬ 
quired to pay the room and board portion of the 
costs but are not required to “spend down” their 
income or assets. 

• In France, the medical and nursing costs in long¬ 
term care institutions are publicly financed, but 
room and board are the responsibility of the serv¬ 
ice recipient. Those who cannot afford the room 
and board costs must apply for welfare assistance 
and “spend down.” 

• The Netherlands covers long-term care under a 
national health insurance scheme, but care is lim¬ 
ited to medically intensive services in nursing 
homes or in the community. Residents must pay 
for their own care in less medically intensive 
homes for the aged; for those who cannot pay 
part or all of the costs, the government makes up 
the difference through general revenues. 

* Briefing paper prepared by Robyn I. Stone for July 27, 1989, working 
meeting. 


• In the United Kingdom, the National Health 
Service covers only medically-oriented long-term 
care. Provision of the bulk of long-term care is 
the responsibility of local social service agencies. 

• Israel has recently implemented a long-term care 
insurance program which provides home care 
benefits (e.g., personal care, homemaker chore, 
adult day care) to the elderly disabled. The em¬ 
phasis is on in-kind services. However, where 
services are unavailable and the eligible person is 
being cared for by a relative living with the bene¬ 
ficiary, cash benefits are provided on a temporary 
basis. 

• Some industrialized countries in Western Europe 
(e.g., United Kingdom, Scandinavian countries, Aus¬ 
tralia) provide cash grants or constant attendance 
allowances to disabled elderly persons. 

• At least three European countries (United King¬ 
dom, Sweden, and Germany) pay relatives to provide 
care to disabled persons. 


Management and Delivery of Services 

• The type of services provided varies across coun¬ 
tries. European countries historically developed more 
nonmedical institutions (like old age homes) than the 
U.S., Canada, and New Zealand. Within Europe, the 
Scandinavian countries, the Netherlands, and the 
United Kingdom offer a wider spectrum of service— 
home and community-based as well as institutional 
care—than other nations. 

• The provision of home care as well as institu¬ 
tional care does not appear to reduce the use of insti¬ 
tutions. Rather, generous public financing for home 
care is associated with higher use of institutional care, 
suggesting a greater willingness to spend on long-term 
care across the board. 

• In most European nations, home and community- 
based services are administered locally. One innova¬ 
tion to improve coordination is the neighborhood or 
catchment area service center. This center functions 


223 



as a focal point for arranging and delivering services 
to disabled persons in the community. 

• Some nations (Denmark, Sweden, the Nether¬ 
lands and the United Kingdom) have formal mecha¬ 
nisms to control admissions to institutions. Many also 
are exploring case management as a mechanism for 
controlling costs and ensuring the appropriate mix of 
home and community-based services. 

• A shortage of nursing home capacity is a major 
difficulty in several European countries. Inadequate 


nursing care in nonmedical institutions is also a grow¬ 
ing problem. 

• Several countries (e.g., United Kingdom, Den¬ 
mark) make greater use of acute and psychiatric hos¬ 
pitals for long-term care of the elderly than does the 
U.S. 

• Lack of coordination between medical and per¬ 
sonal and support services is a problem facing all in¬ 
dustrialized nations in providing long-term care. 


224 


Canadians’ Use of the American Health Care System * 


At our last Commission breakfast, you expressed an 
interest in learning if U.S. hospitals serve as a “safety- 
valve” for Canadians who have to wait for or can not 
get certain services. In order to assess the problem, 
the staff questioned knowledgeable individuals associ¬ 
ated with a number of major medical institutions in 
the northern United States. 

It was difficult to obtain precise numbers and to 
know how to interpret the numbers we got. Tourists 
with emergencies were indistinguishable from those 
patients who were referred to the United States. It 
was not possible to systemically identify referral pat¬ 
terns or types of treatment sought. We supplemented 
our data by asking American health officials for per¬ 
ceptions of Canadian usage of their institutions. Some 
of the respondents’ comments are quoted below. 

A better study would follow Canadian patients to 
examine usage patterns and their reasons for choosing 
American treatment over Canadian care, but it was 
beyond our capacity to do so in this short time 
period. 


Summary of Findings 

Of ten institutions surveyed, two gave evidence 
that they served a significant number of Canadians for 
certain specific procedures. The remaining American 
hospitals contacted treated a few Canadian patients 
for a variety of services and specialty care. These re¬ 
sponses suggest that small numbers of Canadians may 
be using American hospitals for special services like 
coronary care and lithotripsy. These patients usually 
pay out-of-pocket for these services. However, there 
is no evidence that substantial numbers of Canadians 
are seeking care at American medical centers. 

Institutions Serving Significant Numbers of 
Canadians— 

• Buffalo General Hospital, Buffalo, AT—Overall, ap¬ 
proximately three percent of Buffalo General s pa¬ 
tients are Canadian. However, fifty of the hundred 
patients each month who receive lithotripsy to de¬ 

• Memorandum to Congressman Bill Gradison from Judith Feder and 
Pushkal Garg, August 18, 1989. 


stroy kidney stones are Canadians. This high use re¬ 
sults from a formal arrangement with the province 
of Ontario. 

Since there is a wait for Ontario’s one 
lithotripter, the province will reimburse Buffalo 
General approximately $3,000 for a single-stone 
procedure (hospital’s charge is the $4,000). This 
$3,000 level of reimbursement is comparable to that 
which the hospital receives from insurers like Blue 
Cross, who use a DRG-based fee schedule, and is 
higher than NY State’s compensation on behalf of 
Medicaid patients. The Ontario Ministry of Health 
has plans to purchase two more lithotripters, but 
has not yet done so. Officials stated that the acquisi¬ 
tion process is slow and that they have decided to 
wait for the next generation of instruments. 

• University of Washington Medical Center, Seattle, 
WA —Among the 72,000 non-emergency patients 
seen over the last five years, 59 have been Canadi¬ 
ans. The dominant services for these patients are 
cancer treatment, neurosurgery for brain injuries 
and rehabilitation services. “Based on volume alone, 
this doesn’t seem to be a large problem.” However, 
125 of the 250 in vitro fertilizations performed each 
year are done for Canadians. Patients pay out-of- 
pocket for this $5,000 procedure. 

Institutions With Very Little Use by Canadians— 

• Cleveland Clinic, Cleveland, OH —The clinic serves 
125,000 inpatients per year. In 1988, 143 Canadians 
made 402 non-emergency visits to the clinic. Al¬ 
though this number is low, it is higher than the 105 
Canadians who sought treatment in 1986 and the 
127 who came in 1987. The patients came for a va¬ 
riety of services, including cardiovascular, orthope¬ 
dic, gastrointestinal and neurosensory treatment. 
“Some wealthy Canadians who get tired of waiting 
may seek treatment in the United States.” 

• Mayo Clinic, Rochester, MS —Canadian usage of the 
Clinic amounted to $7,775,000 ($5,375,000 for out¬ 
patient and professional services and $2,400,000 for 
hospital services), which is approximately one per¬ 
cent of gross income. This utilization involved all 
services, across-the-board. Canadians tended to be 
well-off, as they paid out-of-pocket. “Thirty years 
ago, 20 percent of income came from Canadians, as 
opposed to only one percent now. This decline is 


225 



probably due to the change of payment plans in 
Canada. Canadian usage of our services is not that 
big a problem.” 

• Massachusetts General Hospital, Boston, MA —The 
admissions staff estimates that less than twenty pa¬ 
tients per year are Canadian citizens. “It is our 
impression that the number is not significant.” 

• University of Rochester Medical Center, Rochester, 
NY —None of the more than 28,000 discharges in 
1988 were from Canada. “This may change with 
the addition of liver and bone marrow transplant 
services to the hospital.” 

• Detroit Medical Center, Detroit, MI —“We see a small 
number of Canadian patients. They usually pay out- 
of-pocket and are seeking some sort of surgical pro¬ 
cedure. Nevertheless, they are not coming over in 
waves.” 

• Henry Ford Hospital, Detroit, MI —Of 31,000 dis¬ 
charges per year, between 80 and 90 are Canadians. 
However, this includes patients seeking emergency/ 
trauma care, which may be significant due to De¬ 
troit’s proximity to the border. Although nearly all 
services and procedures were represented, many of 
the patients sought cardiovascular or lithotripsy 
care. “The numbers are not large, but the longer 
lines and fewer services offered in Canada are a 
factor in Canadian patients choosing to use us.” 

• Johns Hopkins Medical Center, Baltimore, MD — 
During fiscal year 1989, 28 of the 35,500 patients 
were Canadians. Seven of these patients were en¬ 
rolled in a specific research program under one 
physician, and five had consulted a particular pedi¬ 
atric urologist, probably for treatment of genetic 
abnormalities. The remaining 16 patients were scat¬ 
tered throughout the hospital. “There is no stam¬ 
pede coming in from Canada.” 

• Memorial Sloan Kettering Cancer Center, New York, 
NY —From 1986-1988 twelve patients were Cana¬ 
dian. There was no pattern by province or age. 
Five of the twelve patients sought treatment for 


bladder tumors. Some stays were paid for directly 
by patients. Others were paid by commercial insur¬ 
ance or, in one case, by Blue Cross. 

Additional Comments—Don Potter, M.D., President 
of the Southeast Michigan Hospital Council, provided 
some interesting anecdotal information about Canadi¬ 
ans’ preferences in obtaining health care. Due to the 
Free Trade Agreement with Canada, a large number 
of Canadian nurses are working in Southeast Michi¬ 
gan hospitals. Most of them choose to receive their 
health care through the Canadian system, for which 
American employers pay premiums to the home prov¬ 
ince. However, these nurses are also offered Blue 
Cross and HMO plans which they frequently switch 
to when they anticipate the need for extensive or 
high-technology medical attention. 

Wally Maher, former Director of employee benefits 
for Chrysler Corporation, mentioned that 10,000 
Chrysler employees are Canadians working at a plant 
in Windsor, Ontario, just across the river from De¬ 
troit. “Despite numerous collective bargaining agree¬ 
ments, these workers have never asked for access to 
Detroit’s excellent medical services,” he said. He 
thought that these Canadian workers would have 
made an attempt to use American medical facilities, 
had it been important to them. 

David Cow, M.D., Manager of Claims Policy for 
the Ontario Ministry of Health, felt that the access 
problems in Canada have been exaggerated. For ex¬ 
ample, between 1986 and 1988, 4000 coronary by¬ 
passes were performed in Ontario. Of 202 instances in 
which Canadians were treated in the U.S., 87.5 per¬ 
cent were emergency cases. Only 25 patients chose to 
be treated in the United States rather than use the Ca¬ 
nadian health care system. “The cardiovascular prob¬ 
lems mentioned in the press are a lot of hype. Some 
cities want improved facilities and publicize these 
cases as proof of a need for new equipment.” 


226 


COMPARISON OF SELECTED COMPREHENSIVE HEALTH PLANS * 


Who’s Covered and How 


Private Insurance 
Provisions 


Small Business Subsidy 


Effect on Medicaid 


Basic Health Benefits For All A Consumer-Choice Health Plan 

(Kennedy/Waxman) (S.768/ National Leadership Commission for the 1990's Enthoven & 

H.R.1845) Kronick 


Employer mandate plus 
Medicaid (or public 
program) 

Expansion and Buy-In 


Employers are required 
to cover all employees 
working 17.5+ hrs/wk 
and consultants and 
contractors 

Employees working 25 + 
hrs/wk must accept 
coverage 

Others are eligible for or 
may buy-in to Medicaid 

State must subsidize 
private coverage for 
employed Medicaid 
eligibles and may do 
so for others 


Community rating by 
“regional insurers” for 
small businesses (25 
employees or less) 

No exclusion for 
preexisting conditions 
Eliminates state 
mandated benefits 
Plus companion 
legislation below 

Subsidies for those small 
businesses whose 
compliance costs are 
in excess of 5% of 
gross revenues 
Very small and new 
businesses have a 
phase-in 

Eligibility expanded as 
described below plus 
improved benefits and 
reimbursement 


Universal Coverage 
through employers who 
"pay or play” and a 
residual public program 
(UNAC) 

Everyone is required to 
have insurance 
through employer or 
self or public program 
(UNAC) 

Employers are required 
to cover all FT 
employees (35+ hrs/ 
wk) or pay tax to 
UNAC 

All employers also pay 
tax for PT workers and 
to finance unemployed 
in UNAC 

Individuals over 150% of 
poverty must pay tax 
to participate in UNAC 

Employers for whom tax 
is less than insurance 
costs may find UNAC 
more attractive than 
private insurance 


Small Businesses (5 
employees or less) and 
new businesses (under 
3 years old) pay lower 
fees 


Folded into UNAC 


Universal coverage 
through employer 
mandate plus public 
sponsored private 
insurance plus 
Medicaid 

Employer required to 
cover FT employees 
(25+ hrs/wk) and to 
cover or pay tax to 
“public sponsor” for 
PT workers 

Everyone not covered by 
current public 
programs or employer 
may buy subsidized 
insurance through 
state level public 
sponsor 


Employers can buy 
insurance directly or 
through Public Sponsor 
for full costs 
No exclusion of 
preexisting conditions 
Plus companion 
legislation below 


Businesses of 25 
employees or fewer 
pay a maximum 8% of 
payroll for insurance 
premiums 


Maintained 


Physicians for a National Health 
Program Himmelstein, 
Woolhandler, et al. 


Universal coverage under 
a public insurance 
program. 


Everyone is automatically 
covered in one 
comprehensive public 
program 

Based on Canadian 
system 


No role for private 
insurers 


N/A 


Folded into insurance 
program 


227 




COMPARISON OF SELECTED COMPREHENSIVE HEALTH PLANS *—Continued 


Subsidy for Premiums for 
Low Income People 


Benefits 


Deductible 


Coinsurance 


Cap on Out-of-Pocket 
Expenditures 


Basic Health Benefits For All A Consumer-Choice Health Plan 

(Kennedy/Waxman) (S.768/ National Leadership Commission for the 1990’s Enthoven & 
H.R.1845) Kronick 


Under 125% of minimum 
wage, no premium for 
employer plan 
For unemployed up to 
100% poverty eligible 
for Medicaid 
For employed up to 
185% poverty states 
pays premiums 
Premium to buy-in to 
Medicaid for 
unemployed 
—3% of income, if 
between 100 and 
185% of poverty 
—4% of income, if 
between 185 and 
250% of poverty 
—5% of income, if 
above 250% of 
poverty 

Hospital care 
Physician care 
Diagnostic testing 
Prenatal and well-baby 
Limited mental health 
EPSDT for Medicaid 
children 


Above 100% of poverty: 
$250/person 
$500/family or 
actuarial equivalent 

Below 100%: Medicaid 
pays 

Above 100% of poverty: 

50% outpatient 
psychiatric 

20% all services but 
prenatal and well baby 
or actuarial equivalent 

Below 100%: Medicaid 
pays 

Above 100% poverty: 

$3,000/family or actuarial 
equivalent 

Below 100% poverty: 
Medicaid pays 


Under 150% of poverty 
Current Medicaid 
participants would 
have limited cost 
sharing 


To be developed by 
political process 

Illustrative plans for cost 
estimates: 

Basic: 

Inpatient, outpatient, 
labor, drugs, limited 
mental health 

Low: 

14 days inpatient, 
drugs, outpatient, 
lab, well baby 


Illustrative plan: 

Basic: $100/person 
Low: $50/person 
$150/family 


Illustrative plan: 

Basic: 20% 

Low: none for inpatient 


Illustrative plan: 

Basic: $1,000/ 
individual; $3,000/ 
family 

Low: No limit 


Individuals below 100% 
of poverty pay no 
premium; sliding scale 
up to 150% of poverty; 
above 150% poverty 
individual pays 
difference between 
subsidy and cost of 
plan (expected to be 
on average 20% 
premium) 


Basic benefits in HMO 
Act: Physician, 
inpatient and 
outpatient hospital 
services; medically 
necessary emergency 
services; crisis 
intervention mental 
health services; 
alcohol and drug 
medical and referral 
services; lab and 
radiologic services; 
home health and 
preventive services 

Up to $250/individual 
(except possibly in 
HMO’s) 


Up to 20% 


Up to 100% of annual 
premium 


Physicians for a National Health 
Program Himmelstein, 
Woolhandler, et al. 


No premiums for anyone 


All medically necessary 
care 

Acute care 
Rehabilitative care 
Long-term care 
Home health care 
Mental health care 
Dental care 

Occupational health care 
Prescription drugs and 
medical supplies 
Preventive health care 


None 


None 


N/A 


228 




COMPARISON OF SELECTED COMPREHENSIVE HEALTH PLANS *—Continued 


Cost Containment 
Provisions 


Health Care Quality and 
Value 


Base Health Benefits For All 
(Kennedy/Waxman) (S.768/ 
H.R.1845) 


Economics of scale and 
community rating said 
to reduce insurance 
costs for small 
businesses 
Managed care option 


Clinical practice 
guidelines developed 
PRO review 


National Leadership Commission 


A Consumer-Choice Health Plan 
for the 1990's Enthoven & 
Krontck 


Physicians for a National Health 
Program Himmelstein, 
Woolhandler, et al. 


Each state UNAC gets a 
prospective budget 
“Innovative purchasing” 
by states 

UNAC sets rates for 
providers which other 
payers may use 
Malpractice reforms 
Practice guidelines 
Managed Care 
Individuals incentives 
through more 
information and cost 
sharing 


Develop health outcome 
data base 
Clinical guidelines 
Technology assessment 


“Managed competition” 
to create cost- 
conscious choice of 
“managed care” plan, 
to encourage growth of 
cost-effective systems 
of care 

Cap on tax exclusion for 
premiums fixed-dollar 
employer contribution 
toward insurance 
premiums, and choice 
of plans to encourage 
cost-conscious choice 
of plans by consumers 
Surveillance and active 
management by 
employers and public 
sponsors, plus risk- 
adjusted premiums to 
focus competition on 
efficiency, not risks 

“Health outcome” data 
base created to 
encourage “wise 
choices” by companies 
and consumers 
Technology assessment 


Reduced administration 
costs—8.2% cost 
savings 

National health costs 
capped at percent of 
GNP 

Resource allocation 
through planning 

Global budgeting for 
institutional providers 

Individual providers opt 
for salary or negotiated 
fees 

Capitation option 


Review boards 
Technology assessment 
Regional planning 


COSTS 


Employer Obligations 


Pays 100% premium for 
those under 125% 
minimum wage 
Pays 80% premium for 
25+ hr/wk employees 
(and proportional 
contribution for 25- 
17.5 hr/wk workers) 
Total costs estimated at 
$33b 

Net cost after offsets is 
$18b 


75% of premium for FT 
workers or for each 
worker not covered in 
health plan: on wages 
up to S45.000, 
approximately 9% 
Every employer pays 
approximately .6% of 
payroll to finance 
unemployed through 
UNAC 

Total cost not estimated 


For FT employees 80% 
of premium of average 
plan plus for each 
worker not covered in 
health plans, pays 8% 
of payroll up to 
$22,500 

Total cost not estimated 


During a transition 
period: 

No new expenditures 
envisioned 

Tax on employers 
equal to previous 
year’s statewide 
total for 
employer’s 
spending for 
health costs go to 
plan 

Total cost equal to 
current 
expenditures 


229 







COMPARISON OF SELECTED COMPREHENSIVE HEALTH PLANS *—Continued 


Basic Health Benefits For All A Consumer-Choice Health Plan Physicians for a National Health 

(Kennedy/Waxman) (S.768/ National Leadership Commission for the 1990's Enthoven & Program Himmelstein, 

H.R.1845) Kronick Woolhandler, et al. 


Individual Obligations 


Federal Government 
Obligations 


Companion Legislation 


Employees pay 20% of 
premium and all other 
cost sharing except as 
subsidized 

Medicaid buy-in costs as 
stated 

Total costs not estimated 


Current programs plus 
cost associated with 
Medicaid expansion 
and mandate 
Total cost not estimated 


Full tax deductibility for 
self-employed 
premiums 

Simplify Section 89 rules 
and waivers for firms 
offering BHB plan 


Pay up to 25 % of health 
premiums 

To purchase UN AC, if 
otherwise uncovered, 
pay approximately 2% 
of adjusted gross 
income (AGI) up to a 
ceiling 

Every employee (over 
150% poverty) pays 
approximately .6% of 
AGI to finance 
unemployed through 
UNAC 

All pay other cost sharing 

Total cost not estimated 

All current Medicaid 
dollars go to UNAC 
plus additional lost tax 
revenues of $12.9b 


Malpractice reform 


Pay up to 20% of 
premium: if company 
contribution is greater 
than cap 80%, excess 
is taxable; if not in 
employer plan, pays 
8% of family income 
up to a ceiling 
All pay other cost sharing 
(if there is any) 


Cost estimates: Net 
increase of 
expenditures of $.3b 


Repeals state mandates; 
section 89 COBRA; 
Eliminate health care 
benefits from cafeteria 
plans 


During a transition 
period: 

No new expenditures 
envisioned 
Tax on individuals 
equal to amount 
now spent for 
premiums and out- 
of-pocket costs 
goes to plan 
Total cost equal to 
current expenditures 


During a transition 
period: 

No new expenditures 
envisioned 
All current state and 
federal health 
expenditures go to 
plan 

Total cost equal to 
current expenditures 

Not addressed 


* Briefing paper prepared for Commissioners by Judith G. Waxman, September 28, 1989. 


230 





An Overview of Issues in Estimating the Market Potential for Private 

Long-Term Care Insurance * 


Estimating the impact and the costs of public policy 
options always entails making many assumptions. This 
is true for both access to health care and long-term 
care. However, because options for altering the fi¬ 
nancing of long-term care are more sensitive to what 
happens over many years, projecting the future is a 
critical issue for long-term care. 

The purpose of this paper is to discuss the relative 
merits of developing projection models, the impor¬ 
tance of some of the key assumptions that must be 
made, the particular problem posed by estimating 
future demand for long-term care insurance, and a 
very brief overview of two alternative long-term care 
public policy models. This paper is not intended as an 
evaluation of the potential for private insurance. 

Public policy models are bound to be controversial. 
Too often results that do not conform to expectations 
lead to rejection of the model while results that do 
are discussed without caveat. Neither perspective is 
constructive. Certainly no computer generated model 
can know what the future holds, while rejection of 
the model leaves us with few alternatives to assist 
public policy decisions. Our understanding of the limi¬ 
tations of a model will make it easier to understand 
the public policy trade-offs and options. Critical to 
making the model useful is a very detailed evaluation 
of how the model’s results are affected by the specific 
assumptions. The relative degree to which results 
change (sensitivity) provide an understanding of the 
key assumptions and how important they are. Using 
upper and lower bounds for the major assumptions 
helps to delineate a range of possible outcomes. 


Why Use a Public Policy Model? 

Past and present are prologue to the future; but not 
necessarily in a simply derived manner. It is not clear 
whether the elderly of tomorrow will look at all like 
the elderly of today. Therefore, when it comes to esti¬ 
mating the future of long-term care in general, and 
the potential for long-term care insurance, in particu¬ 

• Briefing paper prepared by Robert B. Friedland, for November 8, 1989, 
working meeting. 


lar, the present is not likely to be an accurate repre¬ 
sentation of the future. 

The fundamental flaw in trending the present for¬ 
ward is that behavior changes over time, and. even 
more complicated, it will change in response to 
changes in public policy. Trending assumes that be¬ 
havior does not change and therefore poses a prob¬ 
lem. For example, applying current service use by 
demographic groupings to projections of the future 
necessitates the assumption that the prevalence rates 
remain the same—that is, the long-term care needs of 
today’s 80 year old widow will be the same for to¬ 
morrow’s 80 year old widow. In lieu of any other in¬ 
formation, this may be the best we can do, but it is 
important to recognize that tomorrow’s 80 year old 
widow might not look like today’s. Furthermore, pro¬ 
jections of how many 80 year old widows there will 
be may not be correct. 

Limitations in our ability to apply the present to the 
future, however, do not necessarily imply that devel¬ 
oping the tools to evaluate the future for purposes of 
public policy is not a worthwhile endeavor. A model 
has the capacity to systematically evaluate many of 
the interrelationships as perceived to be affecting be¬ 
havior. It therefore enables researchers to test the rel¬ 
ative importance of these relationships. As a research 
tool, such models offer the opportunity to carefully 
think through, and estimate our understanding of 
these relationships and to establish a focused research 
agenda that can assist public policy. 

The more realistic the model, the less sensitive the 
outcomes will be to slight differences in assumptions. 
Testing this sensitivity is critical in developing the 
model and in understanding its limits. Generating such 
a model must be an ongoing endeavor, as research— 
guided by the focus of the model—brings to light a 
clearer understanding of these relationships. 

The relative ease and our temptation to view a 
single set of results encased in a table as the “truth” 
can easily mislead public policy. As a policy tool, 
therefore, it is important that the limitations of mod¬ 
eling be understood and that the range of outcomes 


231 



associated with various assumptions be used as indica¬ 
tors, rather than definitive answers. With the appro¬ 
priate caution, models can be used as important inputs 
in the decision making process. 


Key Assumptions in a Long-Term Care Model 

To be useful, a model should be able to project 
how much the cost of long-term care will change and 
the distribution of the financing of this cost, assuming 
no change in public policy. This is usually called the 
“base case.” While the model’s results after the intro¬ 
duction of a specific public policy option into the 
model can be informative, the comparison with the 
base case is much more relevant. It tells you how 
much difference the policy made. Important consider¬ 
ations in evaluating the impact of the policy change is 
how total costs change and the distribution of that 
change in total cost. The array of assumptions that 
are critical to posing hypotheses about the future 
include: 

• the distribution of the population; 

• how the change in the population will affect the 
need for and demand of long-term care services 
and how this will affect the cost of long-term 
care services; 

• how the economy will change and how this will 
affect the economic well being of those who are 
at risk of needing long-term care; 

• how individuals’ income and assets will affect the 
demand for and supply of private long-term care 
insurance policies and consequently the price and 
ownership of such policies. 

The size and distribution of the population depends 
on fertility and mortality rates. The size and distribu¬ 
tion of the population, in conjunction with disability 
rates, have a direct effect on long-term care service 
use. The demand for long-term care services, in con¬ 
junction with the supply of services, affects the cost 
of services. Both the feasibility of purchasing private 
insurance and the demand for long-term care insur¬ 
ance depend on the economic resources of the popu¬ 
lation, the proportion of one’s resources that can be 
reasonably devoted to such policies, the price and 
adequacy of the policies, and the willingness of con¬ 
sumers to purchase policies. 

Demographic Factors, Service Use, and the Cost of 
Services— 

1. Fertility and Mortality Rates —We know a great 
deal about fertility and mortality rates and can, under 
the assumption that fertility and mortality rates con¬ 


tinue along the same path, project future age and sex 
distributions of the U.S. population. Since part of the 
future distribution of working adults and elderly have 
already been born, there is a fairly well known lead 
time on these projections. But slight variations in 
either fertility rates or mortality rates can have sub¬ 
stantial impacts on the projected age distributions. 
Our ability to project the future elderly population 
has historically been frustrated by an inability to fore¬ 
see improvements in mortality rates. 

2. Disability —Clearly, the potential for needing 
long-term care depends on morbidity or disability 
rates (as well as the severity of that disability and 
living arrangements). It is easiest to assume that dis¬ 
ability rates by age and sex, and marital status in the 
future will remain the same; but the size of the pro¬ 
jected long-term care population will directly depend 
on assumptions of mortality rates. If mortality rates 
are assumed to continue to decline (more people at 
each age and sex group are assumed to survive) and 
disability rates remain the same, then more people 
will need long-term care. The literature on the rela¬ 
tionship between mortality and morbidity is not con¬ 
clusive. That is, we do not know if people are living 
longer and healthier or surviving strokes and heart 
attacks only to need assistance from others to func¬ 
tion on a daily basis. 1 There are data to support both 
notions. 

It is certainly impossible to project medical break¬ 
throughs on major chronic debilitating conditions. 
But, delaying the onset of Alzheimer’s Disease or 
some other related dementia, or controlling inconti¬ 
nence with drug therapies, for example, would sub¬ 
stantially alter the long-term care needs in the future. 

3. Long-Term Care Service Use —We know relatively 
little about the course of long-term care over an indi¬ 
vidual’s life. Furthermore, what we do know is based 
on current financing arrangements. How we have fi¬ 
nanced long-term care has had a tremendous influence 
on the organization and delivery of care (as well as 
the quality of that care). Very recent data bases pro¬ 
vide new insights into utilization and caregiving ar¬ 
rangements, but most of this information is at a single 
point in time or, at the most over a fairly limited 
period of time. 

Projecting is complicated by the fact that the very 
public policy under investigation may, by itself, also 
alter service use. Service use may change in several 


1 See for example Kenneth G. Manton, “Past and Future Life Expectancy 
at Later Ages: Their Implications for the Linkage of Chronic Morbidity, Dis¬ 
ability, and Mortality,” Journal of Gerontology (September 1986): 672-681; 
and James F. Fries, “Aging, Natural Death, and the Compression of Morbid¬ 
ity,” New England Journal of Medicine (July 17, 1980): 13CM35. 


232 



ways. Current use has been limited by the availability 
of services and the ability to pay for services that are 
available. Increased financing may make these serv¬ 
ices available, and coverage (which subsidizes the cost 
of the service) will enable more people to avail them¬ 
selves of the services. Second, service use may in¬ 
crease because the availability of services may alter 
the type and/or quantity of care provided by family 
and friends. Finally, to the extent that informal 
caregivers may not be available to provide care in the 
future (e.g., due to decreased fertility rates and in¬ 
creased labor force participation rates among women), 
there will be a greater demand for formal services. 

4. Cost of Long-Term Care —A critical assumption is 
the expected cost of care. Both the demand and 
supply of services will affect the price and cost of 
paid care. The demand is dependent on the popula¬ 
tion, disability rate, utilization rate, and the financing 
(including reimbursement policy). The supply of care 
also depends on financing and, in particular, reim¬ 
bursement, as well as the availability of people to 
work as caregivers, care coordinators, administrators, 
etc., in providing long-term care. 

The interesting problem posed by rising prices is 
that the market responds in countervailing ways. The 
higher the reimbursement relative to the cost of pro¬ 
viding care the more likely the supply of services will 
increase. However, depending on how sensitive po¬ 
tential users are to the price, the higher the price, the 
less the demand for that service. Our understanding of 
these interactions, especially when we compound the 
complexity of the issue with different kinds of serv¬ 
ices that can be substituted for one another, is rela¬ 
tively limited. 

Key Issues Concerning Estimating the Potential for 
Private Long-Term Care Insurance—A number of as¬ 
sumptions must be made to estimate the potential pri¬ 
vate long-term care insurance market. Some of the 
more critical issues include how will the emerging 
private market change—without any public policy 
intervention—the potential in the future of individuals 
to afford policies, and the relationship between afford¬ 
ability and the decision to actually purchase a policy. 
Affordability depends on the income and assets of 
consumers as well as the price of the insurance policy. 

1. Predicting the Future From the Emerging Private 
Long-Term Care Insurance Market— Private insurance 
for some long-term care has been available for a 
decade or so. Most large health or life insurance 
companies did not express any interest in developing 
policies until after 1985. Since then, the market for 
long-term care insurance has changed dramatically. 
The number of policies sold has increased from virtu¬ 


ally zero a decade ago to perhaps over 1.3 million, 
with most of that growth in the last two years. The 
estimated number of policies sold increased from 2.8 
percent to 5.4 percent of the elderly. By today’s 
standards, many of the policies sold for long-term 
care even 3 years ago would no longer be considered 
adequate long-term care insurance policies. These 
recent changes reflect insurer competition, regulator 
concern, and consumer preferences in the develop¬ 
ment of this market. 

The most promising development for the expansion 
of the private insurance market has been employer in¬ 
terest. Employers have the potential to focus em¬ 
ployees’ attention on the need to consider long-term 
care in their retirement planning. Furthermore, em¬ 
ployment based policies have less administrative and 
marketing costs than individually sold policies. Cur¬ 
rently about 35 employers provide (or are about to 
provide) access to a long-term care insurance policy 
that costs about 25 percent less than the same policy 
sold on an individual basis. 

Most employers that have established plans have 
made the insurance available to their employees and 
their spouses, retirees and their spouses, and the par¬ 
ents of employees or their spouses. Except for two 
union negotiated pilot studies, premiums have been 
employee-paid. 

How far will this trend go? Will employees and em¬ 
ployers begin to restructure employee compensation 
to include an employer payment of premiums? (Many 
employers do provide more conventional benefits— 
pensions and health insurance—but about half of all 
workers are not covered by a pension and 15 percent 
of all workers are not covered by employer-provided 
health insurance.) 2 

The rapid developments, as well as the infancy of 
this market pose serious problems for projection pur¬ 
poses. Data are insufficient to know how these poli¬ 
cies (and their price) will change and how employer 
and purchaser attitudes will change in the future. 

2. The Importance of Income and Assets: Affordability 
and Demand for Long-Term Care Insurance —Both the 
state of the economy and how people have fared over 
the projection period are very critical components of 
any projection endeavor. Retirement income, both 
from employee pensions and social security, is di¬ 
rectly related to work histories and the economy 


2 Joseph Piacentini and Timothy Cerino, EBRI Data Book on Employee 
Benefits (Washington, D.C.: Employee Benefit Research Institute, forthcom¬ 
ing); and Deborah J. Chollet, “Uninsured in the United States: The 
Nonelderly Population Without Health Insurance”, 1986 (Employee Benefit 
Research institute, 1988). 


233 



during those years. The amount of assets accumu¬ 
lated, too, are directly related to these factors, as are 
savings behavior and inheritances. 

Income and assets are important in making deci¬ 
sions about receiving long-term care, purchasing long¬ 
term care insurance, and whether or not the need for 
long-term care will entail any Medicaid expenditures. 
Underestimates of savings, for example, will lead to 
an increased likelihood of disabled people needing 
assistance from the state Medicaid program and an 
underestimate of the potential of long-term care insur¬ 
ance. We know that savings behavior varies by age 
cohort and by sex and marital status; what we do not 
know is how savings behavior will change. 

Most discussions on the potential for long-term care 
insurance center on the question of what is affordable. 
Affordability indicates who could purchase long-term 
care insurance; demand, however, is the indicator for 
willingness to actually purchase. Changes in demand 
could affect the supply and the price of insurance. 
Lacking appropriate data to determine demand, 
affordability is often used as a proxy for the market 
potential. But affordability is a subjective concept. 

What is a reasonable assumption for affordability— 
two percent, five percent, ten percent of income? 
How important are the level and type of assets in in¬ 
fluencing an individual’s willingness to purchase a 
policy? There are no data other than preference polls 
from which to gauge the demand for insurance 
relative to family income and assets. Furthermore, 
affordability may be different over various stages in a 
individual’s lifetime. 

A comparison of two measures of affordability in 
the current population (age 45 and older), illustrates 
how estimates may vary. Under an affordability as¬ 
sumption that people who are not now disabled 
would purchase long-term care insurance if they had 
at least $10,000 in assets and premiums were not more 
than 5 percent of their income, 54 percent of the 
population age 45 to 64 and 7 percent of the current 
population age 65 or older would be able to afford a 
$50 a day nursing home benefit and a $25 a day home 
care benefit long-term care insurance policy (with a 
60 day deductible). 

If, instead, affordability were based on “discretion¬ 
ary” income and assets (annuitized assets and income 
with necessary expenditures, such as food, shelter, 
clothing, medical expenses, and taxes, etc., subtracted 
out) and if affordability were defined as 20 percent of 
discretionary income and assets, then 54 percent of 


the nonelderly and 4 percent of the elderly would be 
able to afford such insurance at age 65 or older. 3 

In this example, more than half of the nonelderly 
were considered capable of “affording” a long-term 
care insurance policy that would pay $50 a day for 
nursing home care, yet only a negligible portion of 
this population have actually bought such policies. 
“Affording” a policy and “demanding” a policy are 
two different things. This may reflect the lack of 
consumer awareness, dissatisfaction with what the 
policy offers, an unwillingness to spend 5 percent of 
their income, or an unwillingness to purchase a policy 
with this value. 

In the future, based on current costs of long-term 
care insurance, the potential for a large segment of 
the population to have purchased long-term care in¬ 
surance depends on (1) how many people will pur¬ 
chase long-term care insurance during their working 
years and continue paying premiums for the rest of 
their life and (2) how many people who do not buy 
such insurance prior to retirement will be willing and 
able to purchase such insurance after they do retire. 

Most policies are marketed as lifetime decisions. 
That is, the price does not reflect the current risk of 
needing long-term care, rather the price is based on 
an average lifetime price. As a consequence, when 
one has been paying premiums for some time, the 
price of the policy is low relative to the risk later in 
life, but high relative to the risk of needing long-term 
care in the earlier years. To retain value in the policy, 
however, policy holders must continue to pay premi¬ 
ums (although some insurers are considering policies 
that refund part of the premium paid). Insurance pur¬ 
chased at age 30 under these financing arrangements 
cost a tenth of what it costs at age 65. 4 

Will a 50 year old, who might not need any long¬ 
term care for 25 years, be willing to risk purchasing a 
policy that will pay $50 a day for a nursing home stay 
and $25 a day for home health care? Consumers face 
several risks in deciding on a policy, including that 
his or her expectations about inflation and the future 
cost of long-term care will be wrong, that he or she 
will not be able to afford to continue to pay the pre¬ 
mium, or that the insurer will not honor the policy 
(either because they are no longer in business or be- 


3 Tabulations using the Survey of Income and Program Participation 
(SIPP) in Friedland, Facing the Costs of Long-Term Care, (Washington, D.C.: 
EBRI, forthcoming). 

4 In addition to compounding interest, premiums are currently so much 
less because it is assumed that a certain percentage of policy holders will 
drop the policy years before the risk of needing long-term care is even no¬ 
ticeable. If these “lapse rates” do not hold (or decline) then the differential in 
premiums by age will increasingly depend on expected rates of return in pre¬ 
mium reserves. Furthermore, declining lapse rates, holding all else constant, 
will lead to increased premiums. 


234 



cause that type of policy was cancelled). Consumer 
preferences could be influenced by employer-paid 
premiums or by government regulation; both of 
which are uncertain. As for the elderly, their future 
behavior depends heavily on their income and assets. 

Projections of the income of the elderly in the 
future from the Pension and Retirement Income 
Model (PRISM) suggest that for married couples who 
turn age 67 between 2012 and 2021, real Social Secu¬ 
rity income is expected to increase nearly 35 percent 
and employer sponsored pension income is expected 
to be more than double the Social Security income 
and employer-sponsored pension income among cur¬ 
rent retirees. For unmarried individuals, Social Secu¬ 
rity income is projected to increase 42 percent and 
employer-sponsored pension income by 81 percent. 
The Dynamic Simulation of Income Model 
(DYNASIM) suggests that mean retirement income of 
the elderly couples will, on average, increase 79 per¬ 
cent by 2010 and 128 percent by 2030. For unmarried 
men, mean retirement income is projected to increase 
57 percent by 2010 and 118 percent by 2030; for un¬ 
married women, the corresponding rates of increase 
are 40 percent and 113 percent, respectively. 

The more optimistic DYNASIM projections sug¬ 
gest that, in 2030, about 80 percent of unmarried 
women and 60 percent of unmarried men will still 
have incomes of less than $20,000 (in 1988 dollars)— 
leaving, for the most part, premiums for long-term 
care insurance in excess of 5 percent of income for 
more than 70 percent of the unmarried elderly in 2030 
(assuming the purchase of insurance did not occur 
until after age 64). 5 How many of these elderly would 
have already purchased long-term care insurance 
(prior to retirement) is not attainable without addi¬ 
tional modeling. Assets of the future elderly are 
unknown. 

Description of Two Alternative 
Public Policy Models 

Two competing models that are in process include 
the Brookings/ICF Incorporated Long-Term Care 
Model and the LifePlans, Inc., Long-Term Care 
Model. Both models have been developed with the in¬ 
tention of estimating the effects of public policy op¬ 
tions on the financing of long-term care. The 
Lifeplans, Inc. model was initiated long after the 


5 From Sheila R. Zedlewski, Roberta O. Barnes, Martha K. Burt, Timothy 
D. McBride, and Jack Meyer, “The Needs of the Elderly In The 21st Cen¬ 
tury,” The Urban Institute, DRAFT. July 1989, Figure 4.5. 


Brookings/ICF, Inc. model was first completed and is 
built in an entirely different way. 6 

The Brookings/ICF, Inc., Long-Term Care Model— 

The results of an earlier version of the Brookings/ 
ICF, Inc. microsimulation model were widely dis¬ 
seminated in a policy study by Alice Rivlin and 
Joshua Wiener in 1988. 7 For many different reasons, 
their book has received a great deal of attention. It 
has been praised for raising the alarm that the cost of 
long-term care is going to increase, and for the at¬ 
tempt to include, as a criterion for public policy eval¬ 
uation, the impact of private financing alternatives on 
current public programs. 8 The latter is an explicit at¬ 
tempt to measure the trade-offs in social policy associ¬ 
ated with public subsidies (that is, who benefits and at 
what expense). On the other hand, the book did not 
provide a sufficiently complete set of sensitivity anal¬ 
yses to enable the reader to understand how sensitive 
the results are to specific assumptions. Other funda¬ 
mental criticisms of the study center around the spe¬ 
cific assumptions used, in particular the long-term 
care inflation rate, and the assumed direct correspond¬ 
ing linkage between need, demand, and supply. 

The Brookings/ICF model builds upon the PRISM 
model of projecting retirement income by adding a 
component that accounts for disability, the use of 
long-term care services, and the sources and levels of 
payment for those services. Basically, the model takes 
individuals age 25 and older in 1979 and simulates the 
rest of their lives using probabilities compared to a 
computer generated random draw. For each life 
“event,” a random number (between 0 and 1) is 
drawn and compared to the probability of that event. 
If the number drawn is less than the specific probabil¬ 
ity, then that event occurs; if the number is greater, 
then that event does not occur. Events include: 
changing jobs, participating in a pension plan, becom¬ 
ing 100 percent vested in that pension, contributing to 
an individual retirement account, getting married, get¬ 
ting divorced, having children, leaving the labor 
market to raise children, re-entering the labor market, 
retiring, becoming disabled, needing long-term care 
services, entering a nursing home, receiving home 
health care, and dying. Each individual in the model 
faces all of these events (and more) for a simulated 
year. The probabilities they face are specific to the in¬ 
dividual’s age, sex, income and marital status in that 
simulation year. The first part of the model, PRISM, 


6 Much of this model is not yet complete. Preliminary and confidential re¬ 
sults have only been shared with a small group of technical advisors. 

7 Alice M. Rivlin and Joshua M. Wiener, Caring for the Disabled Elderly: 
Who Will Pay?, (Washington DC: Brookings Institution, 1988). 

8 See for example Christine Bishop, “Long-Term Care: Sharing of the 
Burden," Science. (243) 1738-1739, Mark V. Pauly in Health Affairs, (Fall 
1988), 169-172; and an unpublished response by the Health Insurance Asso¬ 
ciation of America, May 1988. 


235 




takes the individual out to age 65. At that age, an in¬ 
dividual’s marital status and retirement income have 
been determined by their experiences within the 
model. 

In the version of the model used for the Rivlin 
and Wiener study, the decision to purchase long-term 
care insurance was made at age 65. It was assumed 
that insurance was purchased as long as premiums 
were below a specific percentage of income for those 
with a minimum level of assets. Assets from the 1983 
Survey of Consumer Finance were statistically 
matched to those who had retired in the model. What 
this implies is that a lifetime of savings behavior of 65 
year olds from an earlier period are assumed to be the 
same for future cohorts of 65 year olds. To the extent 
that different cohorts are more or less inclined to 
save, and have the ability to save, this will bias future 
projected levels and types of assets. Furthermore, the 
model did not incorporate any savings from retire¬ 
ment age forward. 

From age 65 forward, individuals were aged and 
then faced events relevant to long-term care, (death, 
disability, long-term care service use). Income, assets, 
and the ownership of long-term care insurance deter¬ 
mine who will end up paying for the care that was 
assumed to be purchased. The long-term care use 
probabilities were derived from the 1982 National 
Long-Term Care Survey and the 1977 National Nurs¬ 
ing Home Survey. 

Since publication of the book, more recent—and in 
some cases, more appropriate—survey data have 
become available. The model has been recently up¬ 
dated to incorporate the asset data from the Survey of 
Income and Program Participation (SIPP), and the 
service use probabilities based on the 1984 follow-up 
and expansion of the 1982 National Long-Term Care 
Survey and the 1985 National Nursing Home Survey. 
More importantly, the model’s long-term care insur¬ 
ance policies have been updated to include an infla¬ 
tion protected benefit and the decision to purchase 
insurance before retirement has been incorporated. In 
one version of the current model, employers are as¬ 


sumed to increasingly make available access to a long¬ 
term care insurance policy and in another, employers 
pay for part of the premium. 

Despite these improvements, the model still faces 
some important limitations. In particular, the model 
does not incorporate any savings behavior after age 
65, there are no long-term care service supply con¬ 
straints, which means that the inflation assumptions 
become very critical, we have incomplete information 
on nursing home lengths of stay, and the model is 
tied to individuals age 25 and older in 1979—limiting 
the time in which future projections can be consid¬ 
ered reliable. 

The model is tied to individuals in 1979 because the 
May supplement to the Current Population Survey 
was matched to Social Security records to enable the 
model to generate Social Security income from actual 
work histories. This means that to obtain results for 
1989, the model has had to produce 10 years of simu¬ 
lations. Thus, for the first 10 years, it is relatively easy 
to see how well the model has been doing compared 
to actual data, but to go 10 years out from today the 
model has to simulate 20 years. Furthermore, because 
of this starting point, only the first half of the baby- 
boom generation is incorporated in the simulations. 

The HIAA/LifePlans, Inc., Long-Term Care 
Model—The Health Insurance Association of Amer¬ 
ica has helped to finance an alternative long-term care 
public financing model. Instead of simulating all of 
life’s events, this model accounts for behavior mathe¬ 
matically, using data on population and market char¬ 
acteristics in solving a variety of important behavioral 
equations. In a joint venture with Lifeplans Incor¬ 
porated and economists at Brandeis and Boston Uni¬ 
versities, this approach models the various markets 
associated with long-term care. This includes the 
supply and demand for long-term care services and 
the supply and demand for long-term care insurance. 

Details on the model are not available, since the 
model is not yet complete, and nothing has yet been 
published. 


236 


Converting Life Insurance Benefits to Long-Term Care Benefits * 


In the October 5, 1989 Commission hearing, Rich¬ 
ard Schweiker, President of the American Council of 
Life Insurance, made some comments that raised 
questions and perhaps some confusion. I thought I 
should sort out three questions that were raised. Spe¬ 
cifically, I would like to address the question of the 
potential to unleash S4.5 trillion for long-term care, 
the Federal tax consequences, and the need for tax 
clarification. 


On the Question of the Potential of the 
$4.5 Trillion 

The $4.5 trillion represents potential life insurance 
liabilities with respect to individually purchased poli¬ 
cies actually in force. Premiums collected for these 
policies do not approach $4.5 trillion (which is nearly 
the entire Gross National Product). In 1989, an esti¬ 
mated 103 million individuals held individual whole 
and term life insurance policies whose death benefits 
would be $4.5 trillion if all policy holders were to 
have died in that year. 

The potential suggested by the $4.5 trillion these 
policies represent assumes that all current policy 
holders pay the slightly larger premium for the long¬ 
term care rider and hold on to the policy until they 
need long-term care. It is not certain how many 
people would do that. Converting the death benefit to 
a long-term care benefit is not costless to the 
consumer. The policyholder who needs long-term 
care loses an equal value of their death benefit. While 
this flexibility could be useful to all policyholders, it 
would be most useful to those who no longer need 
the protection of life-insurance, that is, the older 
population. 

Survey data tabulated by the ACLI suggests that in 
1987, while 18 percent of the policies were held by 
those age 65 or older; 32 percent of the non-elderly 
and 49 percent of the elderly have whole-life or uni¬ 
versal insurance. 


* Memorandum to Commissioners from Robert B. Friedland, November 
18. 1989. 


The potential of the policy to actually cover long¬ 
term care is primarily based on the value of the death 
benefit. While the likelihood of having a policy does 
not vary very much by income, the value of the death 
benefit does. In 1984, median coverage was $42,000 
among those with household income in excess of 
$35,000 but less than $7,300 among households with 
less than $17,500 in household income. Median 
income of the elderly in 1987 was $14,334. According 
to the ACLI, the average death benefit for permanent 
life insurance policies sold in 1988 was about $50,000. 
At the moment about 11 life-insurance companies sell 
policies with long-term care riders. Most of the poli¬ 
cies allow policy holders the use of the entire death 
benefit; although there are a few that will limit the 
use to perhaps half the death benefit. Except for the 
“dread disease” or terminal illness policies the death 
benefit is paid in increments of a certain percent per 
month, typically 2 percent per month. That is, if one 
is holding a policy with a $50,000 death benefit, the 
long-term care insurance potential in a typical policy 
would be $1,000 a month for 50 months. (The 
monthly average cost of nursing home care is $2,000.) 


On the Tax Consequences of This Conversion 

Whole or universal life insurance consists of a death 
benefit and a cash value that arises by virtue of the 
level of premium payments (premiums are greater 
than the risk of dying in the early years and less than 
the risk of dying in the later years). The cash value is, 
however, available as a loan or if the policy is sev¬ 
ered, outright. In this sense, whole or universal life in¬ 
surance is life insurance whose death benefit is not 
taxed and a savings instrument whose earnings are not 
taxed as they accrue but is subject to taxation if used. 
Under current law, beneficiaries do not pay income 
taxes on the death benefit they receive (and there may 
be, however, estate taxes). If the policy holder had 
decided to cash in their life-insurance policy, the 
cash-value less the premiums paid would, however, be 
subject to income taxes. 

Mr. Schweicker indicated that having an individual 
convert a death benefit to a long-term care policy 
would not cost the federal government any loss in tax 


237 



revenues. This is correct if all life-insurance policies 
are not cashed in prior to death. However, if a policy 
would have been cashed in, but because of the rider is 
not, then there is a loss in tax expenditures. That is, if 
one were to cash in their life-insurance policy—even 
to purchase long-term care insurance—this transaction 
could result in some additional tax revenues. (How¬ 
ever, if the cash is used for medical reasons, those 
expenditures—in excess of 7.5 percent of adjusted 
gross income—could be itemized as a durable medical 
expense.) 


On the Need for Tax Clarification 

It should be pointed out that life insurance riders 
for long-term care do not necessarily need tax clarifi¬ 


cation to exist. There may be some controversy at the 
state level that clarification would assist, but by and 
large, such policies could be (and are) sold under the 
current tax code. The clarification desired, however, 
would help insurers in marketing these policies (and 
the policy holders who receive long-term care bene¬ 
fits under the policy). Current tax law does not define 
long-term care and therefore leaves the treatment of 
long-term care and long-term care insurance ambigu¬ 
ous. It is not clear under current tax law whether the 
benefit payment received must be reported as taxable 
income. Treating these benefits as health benefits 
would clarify that the benefits are not subject to fed¬ 
eral income taxes. 


238 


Adding a Long-Term Care Option to Medicare * 


One approach to expanding long-term care cover¬ 
age would be to offer individuals over age 65 an 
option to limit Medicare acute care coverage in order 
to pay for a long-term care benefit. Individuals could 
choose what mix of acute and long-term care benefits 
they want. 


The Tradeoffs 

At least part of the costs of any long-term care in¬ 
surance could be defrayed by raising the deductibles 
for Medicare’s existing acute care benefits. The costs 
could be spread over both Parts A and B, although 
Part A is more complicated and could result in multi¬ 
ple deductibles as it is currently configured. Simpler 
and perhaps a more manageable mechanism would be 
to raise only the Part B deductible. 

Since so many beneficiaries now exceed the Part B 
deductible, raising it just a little will yield consider¬ 
able revenues. As the deductible amount increases, 
however, the “return” from this process declines. 
Fewer and fewer beneficiaries are likely to have such 
high physician expenses. For example, increasing the 
Part B deductible to $400 from its current $75 would 
save approximately $172 per enrollee in 1991. Raising 
the deductible to $600 would save approximately $249 
to be applied to a long-term care benefit. Pushing the 
deductible to $800 would raise $314 per enrollee (un¬ 
official CBO numbers). 

What will it cost to offer limited long-term care 
benefits to the elderly? The cost of a one year “front- 
end” program (covering the first year of nursing 
home care) would be approximately $400 per en¬ 
rollee. The public cost of a nursing home benefit that 
would begin after a two year waiting period (“back¬ 
end coverage”) would be approximately $600 per 
person. (These are actually 1993 costs expressed in 
1989 dollars—but they offer a reasonable benchmark 
for comparison with what could be raised from Part 
B deductible increases.) 


* Briefing paper prepared by Marilyn Moon for February 5, 1990, working 
meeting. 


These figures suggest that it would be difficult to 
fund even very restricted benefits from a Part B de¬ 
ductible increase. To do so would likely require a 
Part B deductible of $1000 and a Part A deductible 
increase as well. At that level, individuals opting for 
the long-term care option would expose themselves to 
considerable acute care risks each year. 

Another approach could be to allow individuals to 
pay part of the costs through a higher premium and 
part through an increase in the Part B deductible. 
Beneficiaries who chose such an option could then be 
assessed an add-on to their Part B premium. The risks 
of high acute care costs in any year would be less¬ 
ened and spread more evenly over time. 


Who is Likely to Buy? 

Higher income individuals who can afford to sup¬ 
plement the limitations on acute care benefits may be 
likely to choose the long-term care option. However, 
such individuals may also be able to afford more com¬ 
prehensive policies through the private sector. A lim¬ 
ited benefit might appeal to moderate income elderly 
persons who cannot afford comprehensive, private 
plans but who would like a limited benefit. 

Adverse Selection—One danger is that those who 
fmd it most to their advantage to choose a long-term 
care option may be those at greatest risk—creating a 
problem of adverse selection. 

In theory, at age 65 there is a large pool of individ¬ 
uals in good health who, if they opt for long-term 
care coverage, could result in a reasonable risk group 
for the program. Most individuals are reasonably 
healthy at age 65 and do not begin needing long¬ 
term care support until they are in their late seventies. 
But that very fact may result in such individuals 
opting for the acute care coverage since they are 
likely to make use of such insurance in their sixties 
and seventies. 

Even at age 65, a considerable portion of Medicare 
beneficiaries may have a sense of the likelihood of 
need for long-term care. For example, each year ap- 


239 



proximately 180,000 persons who are receiving Social 
Security disability benefits turn 65. In addition, others 
who may not have qualified as totally and perma¬ 
nently disabled under Social Security may also have 
some disability that is likely to result in eligibility for 
long-term care benefits over time. Persons with 
chronic conditions such as arthritis or diabetes may 
also be able to anticipate future needs for long-term 
care services. 

It would be unfair to prevent such individuals from 
participating; indeed, giving such persons access to 
coverage would seem to be a goal of the program. 
Nonetheless, if these individuals chose the long-term 
care option, the group could start out with a very ad¬ 
verse risk pool that could quickly escalate costs and 
discourage others from participating. Private insurers 
who could exclude individuals in poor health could 
offer better plans to those in good health, further af¬ 
fecting adverse selection. 

In addition, to offer stability to the program, con¬ 
siderable limits would need to be placed on how 
often, if ever, an individual would be able to switch. 
A one-time only decision would certainly be the sim¬ 
plest to administer and result in the least amount of 
adverse selection. Another approach might be to only 
permit a one-time choice but offer some flexibility by 
allowing individuals to postpone the decision until age 
70, for example. In such a case everyone would start 
out in the traditional Medicare program, but be able 
to switch to the long-term care option up until they 
reach age 70. The premium cost and/or deductible 
tradeoff would rise over time to reflect the greater 
actuarial costs of allowing such choice. 

More frequent switching—for example, offering the 
choice every five years—could also be allowed, but 
could substantially drive up the costs of the program. 
Under such a scheme, there would be fewer years to 
build the equity in the long-term care option and thus 
it would require much greater tradeoffs against the 
acute care benefits. In addition, if considerable switch¬ 
ing is allowed, private insurers might be less willing 
to offer supplemental or wrap-around policies—par¬ 
ticularly for long-term care. 

Who Benefits?—If the deductibles necessary to sup¬ 
port the program are as large as it appears, the takeup 
of this option is likely to be quite small and limited to 
individuals who know that they will need long-term 
care. This would certainly be an important benefit to 
such individuals because they probably will never be 
able to purchase such protection in the private 
market. What is largely unknown is the perception of 
the value of the tradeoff between a $1000 or more de¬ 


ductible on the acute care side for a limited nursing 
home benefit. 

Another possible group opting for long-term care 
coverage would be individuals who have good wrap¬ 
around coverage from employers or as retirees. They 
would likely view a long-term care benefit as a way 
to avoid duplicate coverage that they now have on 
the acute care side. Similarly, some individuals may 
simply prefer to buy private acute care policies in ex¬ 
change for some long-term care coverage. These 
would likely be relatively high income beneficiaries 
who could afford to pay another $500 or more a year 
in premiums. 

Who Loses?—In theory, the Medicare option would 
be cost neutral and no one should lose from this plan. 
In practice, however, there may a risk of destabilizing 
Medicare. Acute health and long-term care insurance 
represent very different types of insurance risk and re¬ 
quire different streams of benefits over time. It would 
be difficult to initially set an appropriate tradeoff be¬ 
tween the acute and long-term care options so as to 
ensure actuarial fairness. Windfalls or shortfalls could 
be created for Medicare over time, requiring adjust¬ 
ments that could throw the system out of balance. 
The premium for long-term care insurance might rise 
more rapidly than anticipated, for example, generating 
not only a crisis for Medicare, but also for benefici¬ 
aries as well. 

If costs rise faster in one program or the other, the 
perception of inequity in treatment could create con¬ 
siderable discontent on the part of beneficiaries. Even 
if the financial balance could be kept, pressures to 
expand coverage might be great from individuals in 
one option who “guessed wrong” to be able to switch 
or at least to receive some relief. 

Finally, another group of losers could be the mod¬ 
erate income individuals enticed to opt for long-term 
care coverage. Several years of high out-of-pocket 
acute care costs could wipe out their resources 
so that they would be eligible for Medicaid coverage 
and never actually benefit from the long-term care 
protection. 


Subsidizing the Option 

Perhaps the strongest criticisms of a Medicare 
option of this sort centers on how few individuals will 
benefit unless some sort of a subsidy is offered to 
those of modest means. An option that would require 
substantially higher out-of-pocket costs for acute care 
would pose untenable choices to many of the elderly. 


240 


For example, a single woman with an income at 200 
percent of the poverty line (about $12,000) is likely to 
have out-of-pocket costs of about $2000, on average. 
That represents about 17% of the person’s income. 
Another $400 in out-of-pocket costs or premiums 
would increase that total to 20%—likely to be beyond 
the budget of that individual. This person would be 
better off to rely on Medicaid for her long-term care 
needs. The issue becomes more complicated for those 
with somewhat higher incomes, but for whom re¬ 
sources are still stretched. 

A simple long-term care option to Medicare could 
be offered as part of a package that also improved 
long-term care coverage for those at lower incomes in 
order to provide some help to all elderly persons. 
Such a combination could be, but would not need to 
be, achieved by giving the Medicare optional cover¬ 
age to low income persons (with no resultant re¬ 
ductions in acute care coverage), and allowing a 
subsidized buy-in to those with somewhat higher in¬ 


comes. By putting the coverage together in a single 
package, the pool of persons in a public plan would 
be increased, probably lessening adverse selection that 
would occur without any subsidized participation. 
Alternatively, such an option to Medicare could 
simply be offered at the same time as a Medicaid im¬ 
provement, keeping the two programs separate but ar¬ 
guing that all the elderly would now have access to 
some federal long-term care protection. 

How could such a subsidized plan be offered? A 
buy-in of the deductibles, premiums and copays for 
Medicare acute care is now being phased in for those 
with incomes below the poverty level. This could be 
extended to the long-term care option. And individ¬ 
uals above poverty, but still with limited resources, 
could be offered the option of buying into this 
extended insurance. At some point, the Medicare en- 
rollee would have to bear the full cost of the pre¬ 
mium—or accept a higher Part B deductible in order 
to obtain the long-term care option. 


241 


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